The Right of First Refusal in Start Ups

When it comes to dealing with the legal-ese that most start-ups need to deal with, there can be a lot of confusion.  One important issue is the right of first refusal, but Start Up Lawyer has published a blog that explains the right of first refusal in company bylaws, found here.

At its core, the right of first refusal is the ability for the start up to purchase back their stock from a stockholder before they sell it to another stockholder.  This gives the start up some control over the availability of stock to third parties, but it is important for the start up to set up this provision in the bylaws.

The first step is to create the structure of the provision; either in the bylaws of the start up or through a clause in each stock purchase that is made although it would not be unusual for a start up to utilize both methods.  Putting it in the bylaws makes it a little harder to overcome any potential challenges and makes it much more convenient and less worrisome that the clause may be left out of the stock purchase agreement.

Putting a right of first refusal clause into the bylaws of a start up can also cause some problems though.  A blanket provision regarding the right of first refusal would also go on to include preferred stock, not just common stock, and this could make some investors choose not to invest.  Investors tend to put their funds into preferred stock, and putting limits or restrictions on that stock could make it harder for start ups to raise much needed capital.  This can be dealt with through the bylaws by defining the terms of right of first refusal when it comes to common stock and preferred stock.

Entrepreneurs have an incredible amount of talent and knowledge when it comes to their product or service, and the field in which they operate.  When it comes to creating the legal limits and expectations, it is best to seek out the assistance of a legal professional with experience working with start ups.  Websites such as Start Up Lawyer help to provide information needed, and also includes resources on everything from venture capitalists to issues unique to start ups,  making it easier for entrepreneurs to understand the legal environment that they must operate within.

Harmony Tapper