Transfer restrictions can matter long before an exit

A startup founder may assume that stock can be sold whenever a buyer appears. Venture-backed companies frequently have contractual restrictions that affect proposed transfers. A right of first refusal (ROFR) and a co-sale or tag-along right serve different purposes and should be analyzed together.

How a right of first refusal works

A ROFR generally gives the company, specified investors or both an opportunity to purchase shares on terms tied to a proposed third-party transfer. The agreement should define the triggering transfer, notice package, election period, purchase allocation, permitted transferees and closing mechanics.

Example: a founder receives an offer for 20,000 shares. Before selling, the founder may need to notify the company and investors and allow the contractually specified purchase rights to run. The precise outcome depends on the signed agreement and any exceptions.

What co-sale rights add

Co-sale rights may permit specified investors to participate in a founder’s third-party sale, typically according to a contractual allocation formula. This protects investors from a founder obtaining liquidity while they remain locked in.

The agreement should address how participation reduces the founder’s transferable shares, whether the buyer must purchase the co-sale shares on matching terms, and what happens if the buyer refuses.

Check exceptions and conflicts

Transfers to family trusts, estate-planning vehicles or affiliates may be permitted, subject to conditions and continuing restrictions. A separate stock restriction agreement, company bylaws or investor rights agreement may impose additional requirements.

Founders should not rely on a verbal statement that a transfer is “permitted.” Review the capitalization table, charter, stock purchase agreements and ROFR/co-sale document together.

Negotiation points for founders and investors

Focus on clear notice periods, reasonable permitted-transfer categories, predictable election sequencing and workable closing deadlines. Also examine interaction with drag-along rights in a company sale. The goal is to protect the investor bargain without making legitimate transfers impossible to administer.

For transaction-specific guidance, see Alex Nahai Law’s related legal services. Legal advice depends on the documents and circumstances of each matter.

This article provides general information, not legal advice, and does not establish an attorney-client relationship.