A right of first refusal gives the company, or its investors, the right to buy shares a holder proposes to sell, on the same terms a third party has offered, before that third party can complete the purchase. It controls who is allowed onto the cap table: a shareholder who receives an outside offer must first present it to the ROFR holders, who can match it and take the shares themselves, or decline and let the sale proceed. It is frequently paired with a co-sale (tag-along) right, which lets investors join a founder’s sale pro rata rather than match it.
The function is governance of ownership. Companies and investors use ROFRs to prevent shares from landing with competitors, unwanted parties, or a fragmented crowd, and to keep some control over secondary transactions while the company is private. For the buyer of last resort it is also an option to increase ownership opportunistically when a holder wants out. On primary issuance the analogous concept is the pro rata right; the ROFR specifically governs transfers of existing shares.
The cost falls on liquidity and speed. A founder or early employee seeking a secondary sale, increasingly relevant when a company stays private for the long horizon deep tech requires, finds the process gated and slowed: the offer must be sourced, presented, and held open for the ROFR period before anything can close, and a willing outside buyer may walk rather than wait or risk being matched out. A ROFR is standard and reasonable in venture financings, but founders should understand its drag on early liquidity and negotiate sensible mechanics (clear notice periods, carve-outs for ordinary transfers, estate planning) so the right protects the cap table without freezing it.