Right of First Refusal and Co-Sale Agreements Explained
Sooner or later, a founder thinks about selling a few shares, whether to pay down a mortgage, fund a family need or simply take a little risk off the table. In a venture-backed company, that sale usually runs through a right of first refusal and co-sale agreement. This guide explains how the two rights work, what the notice process looks like and which details are worth negotiating early.
Key takeaways
- A right of first refusal (ROFR) lets the company, and often investors, buy shares a founder wants to sell, on the same terms a third-party buyer offered.
- A co-sale right (also called tag-along) lets investors sell some of their own shares alongside the founder in that same deal.
- Together they keep the cap table under control and stop founders from quietly exiting while investors stay locked in.
- Negotiate sensible exemptions, such as estate planning transfers, before you sign, not when you want to sell.
In a typical US priced round, the main documents usually include a stock purchase agreement, an investor rights agreement, a voting agreement and a right of first refusal and co-sale agreement. The last one gets the least attention during the raise, because nobody plans to sell shares the week they close a round. Then a few years later, a secondary sale opportunity appears and every line suddenly matters.
A quick note: this article is general information, not legal, tax or investment advice. Share transfers can have tax and securities law consequences, so speak to a qualified lawyer and tax professional before you agree to any sale.
What the agreement does
The right of first refusal and co-sale agreement is usually signed by the company, the investors who buy preferred stock and the "key holders," which normally means founders and sometimes other large common shareholders. It does two related jobs.
- It controls who can join the cap table. The company and investors get a chance to buy shares before an outsider does, which keeps ownership in friendly hands and avoids surprise shareholders.
- It shares liquidity fairly. If a founder finds a buyer, investors can take part in the sale instead of watching from the sidelines.
Model versions are published by the NVCA in the US, and the BVCA publishes UK model documents. In the UK, pre-emption on transfers and tag-along rights usually live in the articles of association and the shareholders' agreement rather than a standalone agreement, but the ideas are much the same.
How the right of first refusal works
A ROFR does not stop you from selling. It gives others the first chance to buy on the same terms you negotiated with an outside buyer.
The usual order of rights
- The company goes first. It can buy some or all of the offered shares at the same price and on the same terms.
- Investors go second. If the company does not take all the shares, investors with a secondary refusal right can buy the rest, usually in proportion to their holdings.
- The outside buyer gets what is left. Only shares nobody else took can go to the buyer, and only on terms no better than those in the notice.
The notice process
Everything starts with a written notice from the selling founder. It usually has to include the number of shares, the price, the form of payment, the buyer's identity and the other material terms. The company and investors then have set periods, defined in the agreement, to decide whether to buy. If nobody exercises, the founder can complete the sale to the outside buyer within a further set period. If the founder waits too long or changes the terms, the process usually starts again.
Pro tip
Before you send a formal notice, have an informal conversation with your board and lead investor. Many secondary sales succeed because everyone already understands why the founder is selling and agrees in principle, which makes the formal process a matter of paperwork.
How co-sale rights work
If the company and investors decide not to buy the founder's shares, the co-sale right kicks in. It lets investors sell a proportional share of their own stock to the same buyer, on the same terms. The founder's own sale shrinks by the same number of shares, because the buyer only wants to purchase a fixed amount.
The idea is simple fairness. Investors backed the founder, and if the founder is cashing out some shares at an attractive price, investors can take a little liquidity too. Note that because the buyer's total purchase does not grow, every investor who exercises co-sale reduces what the founder can sell.
Common mistake
Promising a buyer a fixed number of shares without allowing for co-sale. If investors exercise their right, you may only be able to deliver part of what you promised from your own holding. Tell any buyer up front that the sale is subject to ROFR and co-sale, and agree how the numbers will adjust.
Exemptions worth negotiating
Most agreements list "exempt transfers" that do not trigger ROFR or co-sale. These carve-outs are where founders can win real flexibility, and they are far easier to agree before you sign than to request later.
- Estate planning. Transfers to a family trust or to immediate family members, usually on condition that the new holder signs the agreement.
- Death or incapacity. Transfers that happen by operation of law.
- Small sales. Some agreements allow a founder to sell a limited amount, defined in the document, without triggering the rights. Not every investor accepts this, so ask.
- Sales to the company. Repurchases under vesting or other agreements.
- Transfers in an approved sale of the company. These are usually handled by the drag-along in the voting agreement instead.
Also check how the agreement interacts with your company's bylaws. Many startups have a separate ROFR on common stock in the bylaws or stock plan that applies to all common holders, including employees. Founders can end up subject to both, so make sure the two do not conflict.
How to handle a founder share sale step by step
- Read the documents. Pull out the ROFR and co-sale agreement, the bylaws, your stock purchase or restriction agreement and any lock-up or approval requirements.
- Talk to the board early. Explain the reason for the sale and the rough size before you commit to a buyer.
- Get a written offer. Agree the price and terms with the buyer, subject to the company's and investors' rights.
- Send the formal notice. Include every term the agreement requires and keep proof of delivery.
- Track the response windows. Note when the company's and investors' periods end and who has replied.
- Allocate co-sale. If investors exercise co-sale, recalculate how many shares each party sells.
- Close within the deadline. Complete the transfer on the notified terms and update the cap table and stock ledger.
- Get tax advice. A sale can create a taxable gain, and the price may also matter for future option pricing, which in the US is usually based on a 409A valuation.
A share sale tracker template
Copy this into a spreadsheet when a sale is on the table. The details below are made up for illustration only.
| Step | Party | Date sent or due (example) | Response (example) | Shares affected (example) | Notes |
|---|---|---|---|---|---|
| Transfer notice | Founder to company and investors | 2 September | Delivered by email and post | 20,000 offered | Buyer named, price per share stated |
| Company ROFR | Company | Window ends mid-September | Declined in writing | 0 purchased | Board minutes record the decision |
| Investor co-sale | Lead investor | Window ends late September | Exercised | 4,000 sold by investor | Founder sale reduced to 16,000 |
Hypothetical example
Imagine Marcus, a founder three years into a venture-backed startup, who is offered a chance to sell a small block of shares to a new investor joining the next round. He talks to his board first, then sends a formal notice listing the made-up example numbers above. The company declines to buy, because it prefers to keep its cash. The lead investor declines its secondary refusal right but exercises co-sale, so Marcus sells slightly fewer shares than planned. Because he told the buyer about co-sale from the start, nobody is surprised, the sale closes on time and his relationship with investors stays strong.
What investors and founders each want
Understanding both sides makes negotiation smoother.
- Investors want founders to stay committed, a clean cap table without unknown holders and a fair share of any liquidity.
- Founders want reasonable flexibility for personal needs, quick response periods so deals do not stall and clear exemptions for family and estate planning.
Most of these interests can be met at the same time. Short, clear notice periods help everyone, and modest exemptions rarely threaten investors. If you are preparing for a fall round, late summer is a sensible time to raise these points with your lawyer, because new investors often sign an amended version of this agreement when they join.
Your ROFR and co-sale checklist
- Confirm who counts as a key holder under the agreement
- Note the order of rights: company first, then investors
- Write down every notice requirement and response window
- Check how co-sale reduces the shares a founder can sell
- Ask for estate planning and family transfer exemptions
- Compare the agreement with any ROFR in the bylaws or stock plan
- Tell any buyer up front that the sale is subject to these rights
- Get tax advice before agreeing any secondary sale
- Update the cap table and stock ledger after closing
Frequently asked questions
Does a right of first refusal mean I can never sell my shares?
No. It means the company and investors get the first chance to buy on the same terms. If they decline, you can usually sell to the outside buyer within the period the agreement allows, subject to co-sale and any other approvals.
Do employees have to follow this agreement?
Usually the investor agreement only binds key holders, such as founders. Employees are more often covered by a separate ROFR in the bylaws or stock plan. Check your own documents to see which rules apply to whom.
What is the difference between co-sale and drag-along?
Co-sale lets investors join a sale a founder has arranged. Drag-along works the other way, allowing an approved group to require other shareholders to join a sale of the whole company. Drag-along normally sits in the voting agreement.
When does the agreement end?
Most versions terminate on an IPO or a sale of the company. Check the termination clause in your own agreement, because the triggers can vary.
Related reading
The bottom line
A right of first refusal and co-sale agreement does not stop founders from selling shares. It sets a fair, predictable process: the company and investors get the first chance to buy, and investors can share in the liquidity if they choose. Knowing the notice steps and windows turns a stressful sale into routine paperwork.
Negotiate sensible exemptions now, keep the tracker ready and talk to your board before you talk to a buyer. With a qualified lawyer and tax adviser involved, your first secondary sale can strengthen trust instead of testing it.
