Right of First Refusal and Co-Sale Agreement

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The right of first refusal and the co-sale agreement govern how and to whom founders and employees can sell their stock.

​Definition​ A right of first refusal (ROFR) provision in a term sheet gives the company and/or the investor the option to purchase shares from founders or other major common shareholders before they are sold to a third party. If the company or investor exercises this right, the sale must be on the same terms offered by the third party. Some term sheets first give the option to the company, then to the investor,* while others simply give the option to the investor.* If there are multiple venture capital investors, the ROFR provision typically specifies that each has the option to purchase a pro rata portion of the shares being sold.*

​Definition​ A co-sale agreement (co-sale rights or tag-along provision) in a term sheet gives one group of stockholders the right to sell their shares when another group does so, and under the same conditions. In venture capital deals, these clauses are typically used to ensure that investors will be able to participate on a pro rata basis in any sales made by founders or other stockholders who pass a specified ownership percentage threshold.

Co-sale rights are typically paired with the right of first refusal. Co-sale rights will assume that ROFR rights haven’t been exercised, and only kick in after ROFR rights have been passed.

​important​ Note that ROFR and co-sale rights may be reserved for major investors.