By Robert Wenzel
As an investor, there are many factors to consider before providing capital to a business. The person providing the money needs to weigh the risks and benefits of investing in a company. One method that can help someone decide if they are making the right choice is by having the business provide a right of first refusal.
A right of first refusal is allows the potential investor to enter into a contract with the business owner based on specific terms. The right of first refusal is also granted before the business can enter into an agreement with another party.
There are several things that can be included in the right of first refusal. Some of factors may be:
1) Duration. For example, the investor may have the right to invest or refuse for 90 days. After the 90 days is over, the business can accept another party if they so desire.
2) Exceptions. Some transactions may be allowed without the right of first refusal, such as accepting money from a friend or family member.
3) Transferability. An individual may transfer their right of refusal to another person or company, which would mean that the transferee has the right to invest before a third party can make an offer.
4) Extinguished on First Sale. If someone declines the right of first refusal, then the company or business can accept another investor.
5) Offer and Acceptance of Terms. When the right of first refusal requires an offer and acceptance, forms and deadlines may be required. For example, the person who would provide the capital is given a notice of investment. The investor would have a certain time frame to accept or reject the terms. Not responding to the notice would be equivalent to a rejection. However, if the person providing the capital agrees to the terms, then the deal must be completed within the time frame or it would be considered a right of first refusal.
The biggest advantage to a right of first refusal is that it allows the potential investor to evaluate the situation and make a sound decision. The company and/or person who would be providing capital can determine if providing capital outweighs any potential negative side effects. Additionally, the investor can determine if the business would provide a return on their money.
However, a right of first refusal also could have a negative side effect. The primary issue would be if there is a breach, then the investor would be limited to recover any damages. One example of this type of drawback would be if the business decides to accept capital from a third party without allowing the original investor an opportunity to provide money. If and when this takes place, the person who has the right of first refusal could sue for any damages that they may suffer but would not be able to prevent the third party transaction from taking place.
As always, the investor needs to evaluate their situation and determine what is in their best interests. A right of first refusal may or may not be beneficial to both sides. It is crucial to evaluate the situation and determine what would help all sides to reach their ultimate goals.