If you’re building a startup or growing a small business, it’s normal to focus on product, customers and funding first. But sooner or later, you’ll run into a document (or negotiation) that includes “ROFR”.
ROFR stands for a right of first refusal. It’s a common concept in Australian business deals, especially where ownership, investment and strategic partnerships are involved. It can be genuinely helpful - but if it’s drafted too broadly, it can also slow down your future plans or make your business less attractive to investors and buyers.
In this guide, we’ll break down what a ROFR is, how it works in practice, where you’re likely to see it, and what you should think about before you agree to one.
What Is A ROFR (Right Of First Refusal)?
A right of first refusal (often shortened to ROFR) is a contractual right that gives one party the option to step in and do a deal before the deal can be offered to someone else.
In simple terms: if you want to sell something (like shares, assets, or a business opportunity), a ROFR means you must give the ROFR holder the first chance to buy it on the same (or substantially the same) terms.
A ROFR usually involves three moving parts:
- The seller (the person or company trying to sell or transfer something)
- The ROFR holder (the person or company who gets “first dibs”)
- The third party (an outside buyer you’d otherwise sell to)
ROFR clauses are most commonly used to control who can become an owner or participant in a business arrangement, and to reduce surprises when something changes.
ROFR vs “Right Of First Offer” (ROFO)
People often confuse ROFR with ROFO (right of first offer).
- ROFO: you must offer the opportunity to the holder first before negotiating with others.
- ROFR: you can negotiate with others, but before you accept a third-party deal, you must give the holder the chance to match it.
For startups, ROFRs tend to be more sensitive than ROFOs because they can affect fundraising and exit opportunities (especially if they apply broadly or last too long).
How Does A ROFR Work In Practice?
A ROFR is only as “good” (or risky) as the process around it. The clause should be clear about when it is triggered, what notice must be given, how long the holder has to respond, and what happens if they say yes or no.
While each contract is different, a typical ROFR process looks like this:
- You receive (or negotiate) an offer from a third party to buy shares or assets, or to take up a particular commercial right.
- You issue a ROFR notice to the ROFR holder, attaching the key terms of the third-party offer.
- The ROFR holder has a fixed time to respond (for example, 10-30 business days).
- If the holder accepts on the required terms, you must sell to them in accordance with the ROFR clause (which may require matching the price and the material terms, rather than every minor detail).
- If the holder declines (or doesn’t respond in time), you can proceed with the third party - usually on the same terms, and often within a specified “sale window”.
What Usually Triggers A ROFR?
A ROFR clause should spell out the trigger clearly. Common triggers include:
- a proposed sale or transfer of shares
- an issue of new shares (less common for a ROFR - but sometimes you’ll see ROFR-like mechanics around new issues)
- a sale of a business or key business assets
- a transfer to an associate or related entity (sometimes excluded, sometimes included)
It’s also important to check whether the ROFR is triggered by direct transfers only (selling your shares), or also by indirect transfers (selling shares in a holding company that controls the shareholder).
Why Do ROFR Clauses Exist?
In most cases, a ROFR exists because someone wants more control over the future ownership or commercial landscape of a deal.
For example:
- A co-founder wants to avoid being “stuck” in business with a stranger.
- An investor wants the chance to increase their stake before an outsider buys in.
- A joint venture partner wants to prevent a competitor from taking their place.
- A landlord or supplier wants more control over who gets certain rights if you assign an agreement.
Where Do Australian Startups And Small Businesses See ROFR Clauses?
ROFR clauses come up in several key documents. If you know where to look, you can spot them early and negotiate the impact before it becomes a problem.
Shareholders Agreements (Most Common For Startups)
In a startup, a ROFR is most commonly a clause that applies to share transfers. If a shareholder wants to sell shares, the other shareholders (or the company itself) may get the first right to buy those shares.
This is often included in a Shareholders Agreement because it helps preserve stability in the cap table, especially in early stages.
For example, if one founder wants to exit, the other founders may want to keep control rather than have an unknown third party buy in.
Company Constitutions
Sometimes ROFR mechanics also appear in a company constitution (particularly for proprietary companies that want rules “built in” to governance).
If your company has a Company Constitution, it’s worth checking whether it includes pre-emptive rights or ROFR-style transfer restrictions - and how those interact with any shareholders agreement.
When both documents cover similar topics, consistency matters. Conflicting rules can cause real delays during fundraising or an exit.
Investment Deals And Funding Rounds
ROFRs can appear in side letters, investor rights deeds, or bespoke investment terms. Investors may request a ROFR to buy shares that other shareholders want to sell (or to participate in future opportunities).
This is where startups need to be particularly careful.
If a ROFR gives an investor too much control, it can:
- make it harder to attract new investors (because new investors don’t want their deal “held up”)
- reduce competitive tension in a sale process (which can reduce your valuation)
- slow down transactions because you must follow notice and waiting periods
Commercial Contracts (Partnerships, Distribution, Licensing)
You might also see a ROFR in a commercial agreement in some contexts - for example:
- a distribution partner gets a ROFR to distribute your product in a new region
- a technology partner gets a ROFR to license your IP for a new use case
- a service provider gets a ROFR to renew or expand a contract
These can be sensible if the scope is tight and the process is clear, but they can also box you in if your business changes direction.
Pros And Cons Of ROFR Clauses For Business Owners
ROFR clauses aren’t “good” or “bad” on their own. Whether a ROFR helps you depends on what it covers, who holds it, and how long it lasts.
When A ROFR Can Help Your Business
- More certainty and stability: you can reduce the risk of unexpected owners or partners entering the picture.
- Protection for founders and existing owners: if someone wants to exit early, the remaining owners get the first chance to keep control.
- Stronger relationships: in joint ventures and long-term partnerships, a ROFR can help maintain trust and continuity.
When A ROFR Can Create Problems
- Fundraising friction: investors may be wary if their investment can be delayed or disrupted by a ROFR holder.
- Deal delays: your sale process may be slowed by notice requirements and response windows.
- Lower leverage: if a third party knows a ROFR exists, they may be less willing to spend time negotiating (because the ROFR holder can match and take the deal).
- Unintended scope creep: a poorly drafted ROFR may apply to more scenarios than you intended (for example, covering internal restructures or transfers to family trusts).
A common mistake is agreeing to a ROFR early on because it “sounds standard”, without thinking about how it will play out when you actually need speed - like during a funding round or acquisition.
Key Terms To Negotiate In A ROFR (And Why They Matter)
If you’re being asked to agree to a ROFR, the goal isn’t necessarily to remove it entirely - it’s to make sure it’s commercially workable and doesn’t restrict your growth.
Here are the terms we often focus on when reviewing or drafting ROFR clauses for startups and small businesses.
1. What Exactly Does The ROFR Apply To?
Be specific about what the ROFR covers. Examples include:
- Shares (ordinary shares only, or also preference shares?)
- Assets (all assets, or only key assets?)
- New opportunities (this is less common and can be restrictive)
If it relates to ownership, think about how it aligns with your overall shareholder rules and decision-making processes. This is often documented alongside your broader governance documents, like a Founders Agreement (early stage) and then later a shareholders agreement.
2. What Transfers Are Excluded?
Most businesses need flexibility to make internal changes without triggering a ROFR process. Common exclusions include transfers:
- to related entities (such as a holding company restructure)
- to a spouse or close family member (depending on circumstances)
- to a trust controlled by the shareholder
- as part of an employee share scheme or option exercise (if relevant)
Exclusions should be drafted carefully so they don’t accidentally create a loophole that undermines the entire purpose of the ROFR.
3. Notice Requirements And Matching Mechanics
Most disputes around ROFRs happen because the process is unclear. A good clause usually answers:
- What must be included in the ROFR notice?
- Do you have to provide the full third-party offer, or just key terms?
- Does the ROFR holder need to match every term, or only price and other material terms?
- How do you handle non-cash terms (like earn-outs, deferred consideration, warranties, indemnities, escrow, or completion mechanics)?
For startups, this matters because deals are rarely “simple cash for shares”. If the ROFR clause doesn’t deal with complex terms, you can get stuck in ambiguity right when the deal is time-sensitive.
4. Timeframes (Response Window And Sale Window)
Timeframes are a big commercial lever. The ROFR holder needs enough time to make a decision - but you also need to keep your transaction moving.
Common timeframe questions include:
- How long does the holder have to accept or reject?
- If they reject, how long do you have to sell to the third party before you must restart the ROFR process?
- What happens if the third-party terms change slightly - does that trigger a new ROFR notice?
Clear timeframes can prevent a ROFR from becoming a “soft veto”.
5. Who Holds The ROFR?
A ROFR can be held by:
- the company (for example, where the documents contemplate a company buy-back, noting that share buy-backs must comply with the Corporations Act and the company’s constitution)
- all other shareholders (pro-rata or otherwise)
- a specific investor
- a founder or key stakeholder
Who holds the ROFR changes how it affects future funding and control. For example, a ROFR held by all shareholders may feel fairer than a ROFR held by one investor - but it can also be administratively harder to run.
6. Funding The Purchase (And What If They Can’t?)
In practice, a ROFR only works if the holder can actually complete the purchase.
Consider:
- Do they need to show evidence of funding (where appropriate)?
- Are there deposit requirements?
- If they accept but fail to complete, what happens next?
This is particularly relevant if the ROFR holder is another founder or small shareholder who may not have the cash available when the clause is triggered.
What Other Legal Documents Should You Review Alongside A ROFR?
A ROFR rarely exists in isolation. It usually sits inside a broader legal framework for how your business is owned, managed and commercialised.
Depending on your business model, it’s worth checking how a ROFR interacts with documents like:
- Shareholder governance documents: your shareholders agreement and/or constitution should be aligned so you don’t have competing transfer processes.
- Employment and equity arrangements: if team members are receiving equity, your Employment Contract and equity documents should clearly cover what happens if they leave (and whether transfers trigger ROFR rights).
- Confidentiality protections: if you’re negotiating a sale or investment while a ROFR exists, you’ll often want an Non-Disclosure Agreement in place before sharing financials, customer lists, or code.
- Customer-facing terms: if your business is scaling and you’re preparing for due diligence, clear customer contracts and policies can make your business easier to invest in or acquire. If you collect personal information online, having a Privacy Policy is often part of basic deal readiness.
For many startups, ROFR negotiation becomes much easier when the rest of your “legal foundation” is tidy and consistent. That way, you’re not trying to fix governance issues in the middle of a transaction.
Key Takeaways
- A right of first refusal (ROFR) gives someone the first chance to proceed on a third-party offer before you can sell shares, assets, or certain rights to someone else.
- ROFR clauses are common in Australian startup shareholder arrangements, but they can also appear in commercial contracts and investment terms.
- A well-drafted ROFR can protect founders and provide stability, but an overly broad ROFR can slow fundraising, reduce buyer interest, and delay exits.
- Key ROFR terms to negotiate include scope, exclusions, matching mechanics, timeframes, who holds the right, and what happens if the holder can’t complete the purchase.
- ROFR clauses should be consistent with your wider legal setup (like your shareholders agreement, constitution, employment arrangements, and confidentiality protections).
If you’d like help reviewing or drafting a ROFR clause for your startup or small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
