Right of First Refusal and Co-Sale Agreement Drafting Prompt

You are tasked with drafting a comprehensive Right of First Refusal (ROFR) and Co-Sale Agreement, a critical corporate governance document that protects shareholders by controlling the transfer of company shares and ensuring existing investors have opportunities to maintain their ownership percentages or participate in liquidity events.

Document Purpose and Context

This agreement serves as a protective mechanism in closely-held corporations and venture-backed companies, establishing a framework whereby existing shareholders have the right to purchase shares before they are sold to third parties (ROFR) and the right to participate proportionally in any approved sale (co-sale rights). The document must balance the interests of founders, investors, and the company while maintaining enforceability under applicable corporate law. Draft this agreement with precision, ensuring all provisions are clear, commercially reasonable, and aligned with current market standards for similar transactions.

Preamble and Parties Section

Begin with a formal preamble that identifies all parties to the agreement with complete legal names and jurisdictions of organization or residence. The parties typically include the Company (as a Delaware corporation or other specified entity), all Founders holding equity, and Investors (including lead investors and major holders). Include the effective date of the agreement and comprehensive recitals that explain the business context, such as the recent financing round, the parties' desire to maintain control over share transfers, and the mutual benefits of the ROFR and co-sale mechanisms. The recitals should establish that this agreement is being entered into in connection with a specific transaction or as part of the company's overall governance structure, and that all parties acknowledge the consideration supporting their obligations.

Definitions and Interpretation

Create a comprehensive definitions section that establishes precise meanings for all capitalized terms used throughout the agreement. Essential definitions must include: "Transfer" (broadly defined to capture any sale, assignment, pledge, hypothecation, gift, or other disposition of Shares, whether voluntary or involuntary), "Shares" (specifying the classes and series of stock covered), "Major Holder" (typically defined by ownership threshold, such as holders of at least 1% of outstanding shares), "Permitted Transfer" (exceptions to the ROFR such as transfers to affiliates, family trusts, or estate planning vehicles), "Proposed Transferor" and "Proposed Transferee," "Offering Notice," and "Exercise Period." Include interpretation provisions addressing how the agreement should be construed, including rules for headings, singular/plural usage, and business day calculations. Ensure definitions are internally consistent and align with the company's certificate of incorporation and other governance documents.

Right of First Refusal Mechanism

Detail the complete ROFR process with step-by-step procedural requirements. When a shareholder wishes to transfer Shares, they must first deliver an Offering Notice to the Company and all Major Holders containing specific information: the number and type of Shares proposed to be transferred, the identity of the Proposed Transferee, the proposed purchase price and payment terms, and all other material terms of the proposed transfer. Specify that the Company has a primary right to purchase all or any portion of the offered Shares during an initial exercise period (typically 30 days from receipt of the Offering Notice) at the same price and on the same terms as offered to the third party. If the Company declines to purchase all offered Shares, establish a secondary ROFR for Major Holders to purchase remaining Shares pro rata based on their ownership percentages, with an additional exercise period (typically 15 days). Address overallotment rights allowing Major Holders who fully exercise their pro rata rights to purchase Shares not purchased by other Major Holders. Include provisions for payment mechanics, closing procedures, and the consequences if the proposed transfer to the third party does not close within a specified period (typically 90 days), requiring the process to restart.

Co-Sale Rights and Tag-Along Provisions

Establish comprehensive co-sale rights that allow non-selling Major Holders to participate proportionally in any approved transfer of Shares by a Founder or other major shareholder. Specify that if a Proposed Transferor receives an offer to sell Shares and the ROFR is not fully exercised, each Major Holder has the right to include in the sale a number of their Shares calculated on a pro rata basis relative to the total Shares held by the Proposed Transferor and participating Major Holders. Detail the notice requirements, including that the Proposed Transferor must notify Major Holders of their co-sale rights and provide all material terms of the proposed sale. Establish the mechanics for co-sale participation, including how the purchase price will be allocated, delivery of shares and payment, and the Proposed Transferor's obligation to reduce their sale quantity to accommodate participating Major Holders. Address situations where the Proposed Transferee is unwilling to purchase from multiple sellers, requiring the Proposed Transferor to either abandon the sale or ensure the Proposed Transferee accepts the co-sale participation. Include carve-outs for Permitted Transfers and specify that co-sale rights terminate upon certain events such as an initial public offering or acquisition of the Company.

Transfer Restrictions and Compliance Requirements

Articulate absolute prohibitions on any Transfer of Shares except in strict compliance with the agreement's terms. Enumerate Permitted Transfers that are exempt from ROFR and co-sale requirements, typically including: transfers to family members or trusts for estate planning purposes (provided transferees agree to be bound by this agreement), transfers to affiliates or entities controlled by the shareholder, transfers by will or intestate succession, and transfers pursuant to a qualified domestic relations order. Require that any permitted transferee execute a joinder agreement becoming a party to this agreement with the same rights and obligations as the transferor. Specify that any attempted Transfer in violation of the agreement is void ab initio, and establish remedies including specific performance, injunctive relief, and the Company's right to refuse to recognize the transfer or register it on the Company's books. Address the treatment of involuntary transfers such as foreclosures or bankruptcy proceedings, and include provisions requiring shareholders to place legends on share certificates referencing the transfer restrictions.

Representations, Warranties, and Covenants

Include mutual representations and warranties from all parties establishing the foundation for the agreement's enforceability. Each party should represent and warrant that: they have full power and authority to enter into and perform the agreement; the agreement constitutes their legal, valid, and binding obligation; their execution and performance will not violate any other agreement, court order, or law to which they are subject; and (for shareholders) they have good and marketable title to their Shares, free and clear of all liens and encumbrances except as created by this agreement. Shareholders should represent the accuracy of their ownership information and acknowledge that they have had the opportunity to review the agreement with counsel. Include ongoing covenants such as the obligation to provide updated contact information, to cooperate in effectuating permitted transfers, and to maintain the confidentiality of the agreement's terms except as required by law or with the Company's consent.

Termination, Amendments, and Miscellaneous Provisions

Specify the events that will terminate the agreement, typically including: the closing of the Company's initial public offering, a merger or acquisition resulting in a change of control where the agreement is not assumed, written consent of holders of a specified percentage of Shares (such as a majority or two-thirds), or a specific termination date if applicable. Establish that amendments require written consent of the Company and holders of a specified percentage of Shares subject to the agreement, with provisions addressing whether all shareholders must consent to amendments that adversely affect their rights. Include comprehensive miscellaneous provisions addressing: governing law (typically Delaware or the Company's state of incorporation) and exclusive jurisdiction for disputes; notice procedures with specific addresses and deemed receipt provisions; assignment restrictions (the agreement binds successors and assigns but parties cannot assign their rights without consent); severability of invalid provisions; integration clause establishing this as the entire agreement superseding prior understandings; waiver provisions requiring written waivers and prohibiting waiver by course of conduct; counterpart execution; and specific performance remedies given the unique nature of equity interests. Address the relationship between this agreement and other governance documents such as voting agreements or investors' rights agreements, establishing an order of precedence for conflicting provisions.

Drafting Standards and Quality Requirements

Draft the agreement in clear, precise legal language appropriate for a binding corporate contract, using defined terms consistently throughout. Employ proper legal formatting with numbered sections and subsections for easy reference. Ensure internal consistency in all cross-references and defined terms. Include appropriate legal disclaimers and acknowledgments, such as shareholders' acknowledgment that they have had the opportunity to consult with legal and tax advisors. Verify that all provisions are commercially reasonable and reflect current market standards for similar agreements in venture-backed companies. The final document should be comprehensive yet readable, protecting all parties' interests while facilitating legitimate transfers and maintaining the Company's ability to manage its capitalization table effectively.