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| Right of First Refusal |
This is a contractual right to enter a business transaction granted by an owner to a potential buyer or investor. The holder of this right is the first party, before anyone else, to be offered the deal, that is, the option of accepting or rejecting a contract with the owner.
Only when the holder turns down the deal is the owner allowed to make the purchase or offer investment opportunity to other potential buyers or investors. For example, a startup company is obliged to offer its investment opportunities first to the venture capitalist that holds the right of first refusal.
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If rejected, the company can then shop around for other potential investors. Thus, the holder of the right of first refusal is always the first party to make an of er or a refusal to invest. In addition to being used in private equity, the right of first refusal also applies to many other types of assets such as real estate.
Note that the right of first refusal is distinct from the right of first offer. The latter only requires the owner to engage in exclusive, good faith negotiations with the right holder before turning to other parties while the former is an of er to enter a contract on exact or approximate terms.
