When negotiating venture capital (VC) deals, there are certain contractual rights relating to share transfers that investors and founders will be keen to include in order to control the shareholder base and influence an eventual exit. Three of the most common contractual restrictions relating to share transfers are: Right of First Offer (ROFO), Right of First Refusal (ROFR) (also referred to as pre-emptive rights), and co sale rights (also referred to as tag along rights).
Here’s what they mean and why they matter.
What is a Right of First Offer (ROFO)?
A Right of First Offer, or ROFO, gives existing investors the first chance to buy shares before they are offered to third parties. If a founder wants to sell, they must notify current shareholders and invite them to make an offer.
Example: A founder plans to sell 10% of their shares. Under a ROFO, investors can negotiate a price before the shares are offered to a third party in the open market.
Why it matters: ROFO provides control and reduces disruption, but it can also limit the seller’s ability to test a valuation in the open market.
Key negotiation points: To the extent that an offer is not taken up by the other shareholders, then a time restriction should be included in relation to the period of time in which the selling shareholder is able to sell to a third party. Furthermore, you would expect to see a provision that states that any such sale must not be on more favourable terms than the terms initially offered to the shareholders.
What is a Right of First Refusal (ROFR)?
A right of first refusal, or ROFR, is more reactive. A shareholder can seek offers from third parties, but before completing the deal, they must give existing investors the chance to match the terms.
Example: A third party offers £1m for shares. Investors with a ROFR can step in and buy on the same terms.
Why it matters: ROFR protects investors from unwanted entrants but it can slow deals and discourage third party / outside investors.
Key negotiation points: Clear time frames should be drafted, balancing the requirement to provide adequate time for an investor to consider the offer whilst also ensuring that the process cannot be unduly delayed or frustrated. You will also often see wording that states that the original offer must be a bona fide third-party offer and, as with a ROFO, any sale to a third party must not be on more favourable terms than the terms initially offered to the investor.
What are co-sale rights?
Also called “tag-along rights”, these allow minority investors and shareholders to sell a proportionate (or all) of their shares when a major shareholder exits. The relationship between a ROFR and co-sale rights facilitates a fair and balanced position for investors and founders.
Example: If a founder sells 50% of their stake, minority investors and shareholders can sell part of theirs on the same terms.
Why it matters: Co-sale rights ensure fairness and liquidity for smaller investors and shareholders, though they can complicate transactions.
Key negotiation points: Further detail relating to co-sale or tag along rights and the specifics points around negotiation can be found in one of our previous articles: What are Drag-Along and Tag-Along Rights? | Key Negotiating Points | DWF.
Additional Points to Consider
In addition to ROFO, ROFR and co-sale rights it is worth noting that there are other contractual protections that will impact how shares can be transferred. As such, you should always review the articles and the shareholders' agreement to carefully consider whether there are any other prohibitions or restrictions relating to share transfers, such as shareholder veto or consent rights, permitted transfer provisions or requirements to adhere to the conditions of any existing shareholders' agreement.
Why These Rights Matter
Together, these provisions safeguard governance and ownership stability. For founders, the challenge is balancing investor protections with flexibility for future fundraising or exits. Overly restrictive terms can hinder growth, while well-drafted agreements build trust and alignment. It is therefore essential to tailor these rights to the specific needs and dynamics of the company and its stakeholders.
ROFO, ROFR and co-sale rights are more than legal jargon—they shape the dynamics of venture-backed companies. Understanding them is essential for founders and investors alike as they determine not only the legal mechanics of transfer but the commercial reality of control and risk allocation throughout the life on the investment.
DWF has the largest venture and growth capital group in the UK with over 85 lawyers in 10 offices, and supports investors and companies across several sectors including financial services, technology, media and telecommunications, life sciences and healthcare and real estate and infrastructure.
