What do I need to know about selling Startup Equity (RoFR and Co-Sale Rights)?

Equity Agreements often contain a Right of First Refusal (RoFR) and components of Co-Sale Rights to restrict the sales of startup equity. We’re covering the basics of this topic to answer some frequently asked questions when it comes to reviewing Equity Agreements and the implications of selling startup equity on the secondary market.

What is the Right of First Refusal (RoFR)?

The RoFR aims to protect company ownership dilution while not completely restricting individual liquidity. It begins with a third party offer to buy non-public equity from an employee. The RoFR will typically be structured as follows:

1. Employee must notify their company of the offer first

2. The company must choose to at least match that offer and purchase the shares instead of the third party within 30 days of being notified

3. If the company declines to buy them, the third party sale proceeds within 90 days, after which time a new notice must be provided and the process repeats

There are some variants to RoFR such as the Right of First Offer, which requires the employee to notify the company of their intention to sale before soliciting a third party offer. We’ve also seen cases of a much more restrictive RoFR where the company can choose to decline the third party sale without purchasing in their place.

What are Co-Sale Rights?

Particularly in the case of Shareholder Agreement, a RoFR can work in conjunction with Co-Sale rights: instead of the company purchasing your shares, they may want to join your sale instead. Let’s look at the variants:

1. Tag-Along Rights: When someone sell their shares to a third party, other shareholders have the right to join that sale with the same terms.

2. Drag-Along Rights: When someone sells their shares to a third party, other shareholders can be forced to join that sale with the same terms.

For these rights, it’s important to break the ‘Company’ monolith into major and minor shareholders, whether they’re company leadership, investors, or general employees. In general, minority shareholders benefit from Tag-Along Rights so they have option to not ‘miss out’ on a good deal. On the other hand, Drag-Along Rights benefit majority shareholders who are looking to push through a complete sale.

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Depending on how all these rights are structured, you can see how selling non-public shares to a third party can become increasingly complicated. A third-party may need to buy additional shares than they originally wanted, in a longer time frame, and potentially with a number of strings attached. Perhaps that’s why so many startup employees are waiting for IPO, as these restrictions typically all disappear upon IPO. Of course, then you are welcomed into the world of lock-up and black-out periods. Huzzah!

For advocacy and beyond,
The Ask Ginkgo Team