How Does ROFO Work?
When an owner decides to sell an asset, they must first offer it to the party holding the ROFO. This party then has a specific timeframe to either accept the offer or decline it. If they decline, the owner can then sell the asset to others, typically under similar or better terms.
Advantages of ROFO
Control: ROFO allows entrepreneurs to control who obtains stakes in their venture, ensuring alignment with business goals.
Valuation: It can help maintain or increase the valuation of a
startup by offering existing stakeholders the chance to buy at current valuations before external parties.
Stability: ROFO can provide stability and predictability in ownership, which is crucial for long-term planning and
strategic decision-making.
Disadvantages of ROFO
Delay in Sale: The process can delay asset sales, as the owner must wait for the ROFO holder's decision.
Valuation Conflicts: Disputes can arise over asset valuation, especially if the ROFO holder feels the terms are unfavorable.
Complexity: ROFO agreements can complicate
legal documentation and require careful drafting to avoid ambiguities.
Key Considerations When Drafting a ROFO Agreement
When drafting a ROFO agreement, entrepreneurs should consider the following: Clear Terms: Define the assets covered, the process for making an offer, and the acceptance or rejection timelines.
Valuation Method: Agree on a method for determining the asset's value, such as a third-party appraisal or market value.
Exemptions: Specify any exemptions or conditions under which the ROFO does not apply, such as sales to affiliated parties.
Conclusion
The Right of First Offer is a strategic tool in entrepreneurship, offering various benefits and challenges. It requires careful consideration and precise drafting to ensure it aligns with the
long-term goals of the business and its stakeholders. By understanding and effectively utilizing ROFO, entrepreneurs can better manage ownership dynamics and safeguard their venture's future.