Startup Learning Series: Understanding ROFR vs. ROFO
ROFR (Right of First Refusal)
➡️ What is ROFR?
The holder has the privilege to match any offer the seller receives before finalizing a deal with a third party. Essentially, they have the right to refuse an initial offer and step in with the same terms.
➡️ Example:
Startup A grants an investor a ROFR. If the startup receives a funding/ acquisition offer from Company X, the investor has the first shot at matching that offer before the startup can proceed with Company X.
ROFO (Right of First Offer)
➡️ What is ROFO?
Unlike ROFR, this gives the holder the first chance to make an offer before the seller approaches others. The seller is obligated to consider this initial offer before entertaining offers from third parties.
➡️ Example:
Startup B gives an investor a ROFO. If the startup decides to sell a portion of its shares, the investor gets the opportunity to present an offer first before the startup explores other options.
Which is more beneficial for Startups?
➡️ ROFO: This can be advantageous for startups aiming to maintain control and nurture strategic partnerships. It provides a structured process for selling shares and ensures that existing stakeholders are considered first.
➡️ ROFR: Startups looking for flexibility might prefer ROFR. It allows them to explore various offers and potentially secure a better deal.
Which is more beneficial for Investors?
➡️ ROFR: Investors seeking security and the ability to protect their investment may lean towards ROFR.
➡️ ROFO: Investors looking for proactive involvement and a first-mover advantage may find ROFO more appealing. It allows them to set the initial terms and potentially secure a deal before others come into play.
Considerations for both Parties
➡️ Negotiation Power: ROFO gives negotiating power to the holder by allowing them to set the initial terms.
➡️ Flexibility: ROFR provides flexibility for sellers to explore various offers before committing.
➡️ Relationship Dynamics: Both agreements impact the dynamics between startups and investors, requiring a careful understanding of the long-term vision and goals.
Conclusion
➡️ The choice between ROFR and ROFO depends on the specific needs and goals of the startup and the investor involved.
➡️ It's not a one-size-fits-all scenario, and understanding the nuances is crucial for creating mutually beneficial agreements.
Other posts in the Startup Learning Series:
🔗 Pre-emptive Rights: https://lnkd.in/dQKcThft
🔗 Liquidation Preference: https://lnkd.in/dRb2Eetc
🔗 Anti-dilution Clause: https://lnkd.in/dFSWs2xH
🔗 Understanding ROFR: https://lnkd.in/dxuVBxge
At STIR Advisors, we help startups and investors with our expertise to navigate through such intricacies.
ROFR (Right of First Refusal)
➡️ What is ROFR?
The holder has the privilege to match any offer the seller receives before finalizing a deal with a third party. Essentially, they have the right to refuse an initial offer and step in with the same terms.
➡️ Example:
Startup A grants an investor a ROFR. If the startup receives a funding/ acquisition offer from Company X, the investor has the first shot at matching that offer before the startup can proceed with Company X.
ROFO (Right of First Offer)
➡️ What is ROFO?
Unlike ROFR, this gives the holder the first chance to make an offer before the seller approaches others. The seller is obligated to consider this initial offer before entertaining offers from third parties.
➡️ Example:
Startup B gives an investor a ROFO. If the startup decides to sell a portion of its shares, the investor gets the opportunity to present an offer first before the startup explores other options.
Which is more beneficial for Startups?
➡️ ROFO: This can be advantageous for startups aiming to maintain control and nurture strategic partnerships. It provides a structured process for selling shares and ensures that existing stakeholders are considered first.
➡️ ROFR: Startups looking for flexibility might prefer ROFR. It allows them to explore various offers and potentially secure a better deal.
Which is more beneficial for Investors?
➡️ ROFR: Investors seeking security and the ability to protect their investment may lean towards ROFR.
➡️ ROFO: Investors looking for proactive involvement and a first-mover advantage may find ROFO more appealing. It allows them to set the initial terms and potentially secure a deal before others come into play.
Considerations for both Parties
➡️ Negotiation Power: ROFO gives negotiating power to the holder by allowing them to set the initial terms.
➡️ Flexibility: ROFR provides flexibility for sellers to explore various offers before committing.
➡️ Relationship Dynamics: Both agreements impact the dynamics between startups and investors, requiring a careful understanding of the long-term vision and goals.
Conclusion
➡️ The choice between ROFR and ROFO depends on the specific needs and goals of the startup and the investor involved.
➡️ It's not a one-size-fits-all scenario, and understanding the nuances is crucial for creating mutually beneficial agreements.
Other posts in the Startup Learning Series:
🔗 Pre-emptive Rights: https://lnkd.in/dQKcThft
🔗 Liquidation Preference: https://lnkd.in/dRb2Eetc
🔗 Anti-dilution Clause: https://lnkd.in/dFSWs2xH
🔗 Understanding ROFR: https://lnkd.in/dxuVBxge
At STIR Advisors, we help startups and investors with our expertise to navigate through such intricacies.
The eChai Effect - In Their Words
"I have evolved from role of Community Builder to Startup Consultant to Startup Ecosystem Enabler to Angel Investor and now launching a Venture Studio and eChai has been a catalyst in my overall journey as Startup Evangelist since 13 years."
Mehul Shah
Co-Founder at Counselvise & Ivy Growth
"eChai is playing biggest role in my personal and professional life together. Its a community where i meet like minded people to share idea and learn from their idea. Even while playing cricket i learn something and i implement something new from that learning. Its my entry point for building network in different countries where my base is not established yet. Personally my only fun activity day in a week is eChai cricket and social."
yash shah
Chairman, ES Group of Companies
“You don’t plan to build a company via eChai. You just keep showing up … and one day, you realize you did.” I’ve known Jatin since 2012, when I was still deciding what kind of second innings I wanted to play as an entrepreneur. Over the years, through events, chai breaks, intros, and seemingly small conversations, eChai helped shape not just Upsquare but also refined the lens through which we see collaboration. At Upsquare, we’ve hired talent, met partners, discovered co-investors, and built lifelong friendships. One of our joint ventures exists today only because a casual eChai memory sparked a deeper trust. Now, as we build House of Starts — our venture builder — eChai continues to fuel our mission: co-creating a shared future. eChai isn’t just a startup network. It’s a trust network. And for business builders like me, that makes all the difference."
Utpal Vaishnav
Founder @ Upsquare & House of Starts • Angel Investor + LP
eChai Partner Brands
eChai Ventures partners with select brands as their growth partner - working together to explore new ideas, open doors, and build momentum across the startup ecosystem.
