Silicon Valley Review S3, Ep8: Can She Do That?
June 17, 2016 | By Kevin Vela
The primary conflict in Episode 8 of this season of Silicon Valley stems from Laurie swooping in and buying out Erlich’s shares at a deep discount to market (i.e. the price that Russ was willing to pay).
Can she really do that?
As Laurie reminds Richard, her right stems from a rather unfriendly deal he signed when the company needed to be bailed out a few episodes ago.
The show doesn’t go into detail, but Laurie most likely exercised a Right of First Refusal (“ROFR”). This is a common term in venture deals, although it doesn’t usually include the right to change the price.
Typically, a right of first refusal gives current investors or the company the first right to purchase shares that an existing stockholder (called a “shareholder” in Delaware) wants to sell before a third party can buy them.
We can infer from the show that this right was assigned to the Board, or to Laurie directly, with a highly uncommon provision that allows her to re-negotiate the price. A ROFR is almost always included in a Series A term sheet, and it usually gives the Series A investors the right to match any third party offers for founder sales or inside sales. It’s not uncommon for there to be tiers of ROFR rights as a company experiences multiple later-stage financing rounds.
Be careful not to confuse a Right of First Refusal with a Right of First Offer (“ROFO”) – another common venture term. A Right of First Offer generally gives investors a right to purchase their pro-rata share of future offerings (as opposed to sales of existing stock by current stockholders) so that the investors can always maintain their pro-rata ownership, should they so choose.
So can she do that? Absolutely. In reality, she probably couldn’t buy the shares at such a steep discount to Erlich’s initial offer, but I’m not surprised that Laurie blocked the sale in that way.
Posted in Silicon Valley Reviews, Startups
Kevin Vela is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, mergers & acquisitions, corporate law, capital raises, and real estate investment activities. You can see Kevin’s attorney profile HERE.