As we recently discussed in our latest article Complexities of Investing in pre-IPO Giants, there are many obstacles to overcome to successfully purchase shares of pre-IPO giants. With a high barrier to entry, historically it has been the largest investment firms clamoring and contending for sizable fractions of a target company. If a verbal agreement is finally made between parties, the deal can only be consummated once it passes the most arduous hurdle, Right of First Refusal (ROFR).
Right of First Refusal is a legal right granted to shareholders, typically V.C.’s, to either decline or purchase additional secondary shares, which would override offers made by a new investor. The company’s existing investors with ROFR rights can block future transactions, provided they buy those shares themselves at the conditions negotiated with that external buyer.
Early-stage investments in private markets can have massive upside potential for those who are willing to take the greater risks associated with early rounds. As the momentum of a company is realized, many early-stage investors and insiders wish to maintain their strong ownership stake and will require protection of their ownership percentage through ROFR stipulations established in their term sheet.
Each ROFR is unique to individual shareholders and a buyer may have to go through numerus ROFR agreements in order to buy shares of a company, which typically takes 30-90 days to complete. Once due diligence is fulfilled and ROFR contracts have been exercised, the incurred latency can distort the effects of the deal, contributing to the greater risks associated with the private market.
Since 2014, InvestX, a deep specialist in facilitating private equity transactions, works to bring buyers and sellers together in an efficient and seamless manner.