Right of First Refusal (ROFR)
A transfer restriction known as the Right of First Refusal (ROFR) gives a company the first chance to buy its stock before a shareholder can sell it to a third party. In India, this clause is often included in agreements to regulate share transfers.
What it Means:
ROFR guarantees control over equity ownership for Indian founders. By granting the company the first right to purchase shares before they are made available to outside parties, it enables the company to preserve its current share structure.
How to Calculate:
Calculating ROFR involves assessing the agreed-upon price for the shares in question. In order to secure the shares before any external transfers occur, the company is entitled to match this price.
Why Measure:
For Indian startups, measuring ROFR is essential because it protects the ownership structure of the business. It shields founders from unanticipated changes in ownership and gives them the ability to strategically distribute equity.
Examples:
Let us say that a shareholder plans to sell 1,000 shares for INR 100 apiece. A ROFR guarantees that the shares stay with the company. The company can exercise this right by matching the INR 100 price.
In the Indian startup ecosystem, understanding and implementing ROFR clauses provide founders with a protective mechanism to preserve the intended ownership structure and navigate share transfers effectively.