Silicon Valley Review S3, Ep8: ROFR v. ROFO

The primary conflict in Episode 8 of this season of Silicon Valley stems from Laurie swooping in and buying out Erlich’s shares at a deep discount to market (i.e. the price that Russ was willing to pay).

Can she really do that?

As Laurie reminds Richard, her right stems from a rather unfriendly deal he signed when the company needed to be bailed out a few episodes ago.

The show doesn’t go into detail, but Laurie most likely exercised a Right of First Refusal (“ROFR”). This is a common term in venture deals, although it doesn’t usually include the right to change the price.

Typically, a right of first refusal gives current investors or the company the first right to purchase shares that an existing stockholder (called a “shareholder” in Delaware) wants to sell before a third party can buy them.

We can infer from the show that this right was assigned to the Board, or to Laurie directly, with a highly uncommon provision that allows her to re-negotiate the price. A ROFR is almost always included in a Series A term sheet, and it usually gives the Series A investors the right to match any third party offers for founder sales or inside sales. It’s not uncommon for there to be tiers of ROFR rights as a company experiences multiple later-stage financing rounds.

Be careful not to confuse a Right of First Refusal with a Right of First Offer (“ROFO”) – another common venture term. A Right of First Offer generally gives investors a right to purchase their pro-rata share of future offerings (as opposed to sales of existing stock by current stockholders) so that the investors can always maintain their pro-rata ownership, should they so choose.

So can she do that? Absolutely. In reality, she probably couldn’t buy the shares at such a steep discount to Erlich’s initial offer, but I’m not surprised that Laurie blocked the sale in that way.