Investment Rounds and Rights of First Refusal: What You Need to Know

Investment Rounds and Rights of First Refusal: What You Need to Know

When a startup seeks funding, one of the most sensitive legal aspects is how the entry of new investors is structured. Beyond negotiating potential preferential rights—such as reinforced majorities or exit rights—rights of first refusal (ROFR) also come into play. These provisions can protect—or complicate—the balance among shareholders.

What are they, and what are they for?

Simply put, ROFR clauses allow existing shareholders to purchase, under equal conditions, the shares that another shareholder intends to sell to a third party or those issued in a capital increase (this alone could be the subject of a separate blog post). It’s a way to ensure that no one enters the cap table without giving existing shareholders the opportunity to match the offer.

These rights serve to:

• Prevent unwanted third parties from entering the company.
• Maintain control and equity percentages.
• Provide stability to the shareholder structure during key moments (funding rounds, exits, conflicts).

What does the law say?

In Spanish private limited companies (sociedades limitadas), the Spanish Companies Act (Article 107 LSC) states that, unless otherwise provided in the bylaws, shareholders have a preemptive right in the case of voluntary transfers. Additionally, Article 93 LSC recognizes preemptive subscription rights in capital increases.

How does this apply in an investment round?

In practice, ROFR clauses usually appear in both the company’s bylaws and the shareholders’ agreement. Their structure varies depending on the operation, but typically:

1. A short period (usually 15 days) is granted to exercise the right. It’s crucial to review corporate documents to ensure the offer price is being respected.
2. Shareholders must match not only the price but also all the terms of the offer.
3. Exceptions are often established, allowing free transfer in certain cases (e.g., intragroup transfers, transfers to investment vehicles, etc.)

For existing shareholders, it’s a tool to retain control. For new investors, it can become a hurdle if not clearly and reasonably defined. This is where the groundwork laid by the board of directors becomes key.

Common pain points during negotiation. Issues often arise from:

• Vague drafting—especially in the shareholders’ agreement—where it’s unclear when the right applies or where timelines are too tight, discouraging potential buyers.
• Pushback from investors, whose entry may be limited. As mentioned above, proactive work by the sole director or board is critical.

To prevent future conflicts, it is advisable to:

• Clearly define when the ROFR applies and when it doesn’t.
• Set a straightforward process: clear notice, reasonable deadlines, and defined consequences for non-response.
• Avoid overlap with drag-along/tag-along clauses or liquidation preferences.
• Adapt the clause to the company’s stage: a seed-stage startup is not the same as a Series A company.

Protection of shareholders with pre-emption rights

Rights of first refusal are a useful tool for protecting existing shareholders, but they must be handled with care. If well-drafted, they help maintain balance. If applied rigidly or opportunistically, they can block strategic deals or scare off potential investors.

As with most things in the startup ecosystem, what matters is not just the clause itself, but how it is negotiated, implemented, and aligned with the company’s current stage.

That’s why proper legal advice is key to anticipating these issues. And if you have any questions, we’d be happy to help.