Meaning
A contractual obligation requires a shareholder to offer their shares to the company or other investors before selling them to an outside party. The right of first refusal gives the existing owners a chance to keep the equity within the original circle. This prevents unknown or undesirable third parties from gaining a seat at the table.
Secondary Transaction
When a founder receives an offer from an external buyer, they must notify the company of the terms. The right of first refusal creates a delay in the sale process while the internal parties decide if they want to match the price. The mechanism ensures that the cap table remains controlled by the board.
Pricing Mechanism
Matching the offer means the company must pay exactly what the external buyer was willing to pay. The right of first refusal often includes a time limit, such as thirty days, for the internal parties to respond. If the company passes on the deal, the seller is free to move forward with the outsider.
Transfer Restriction
Limits on who can buy shares help protect the competitive secrets and strategic direction of the firm. A right of first refusal is a standard tool in private company governance to manage liquidity and ownership. The clause remains active until an initial public offering or a total sale of the business.
