Right of First Refusal show significant uptick on Forge Markets

In this short clip from our Q3 Forge Investment Outlook webinar, Andrew Alden, Senior Director of Quantitative Analytics, shares insights on how ROFR rates are increasing on Forge Markets.

Learn more about “The Great Reset” and find additional private market data in the Forge Investment Outlook report.

Dan ChaparianVP of Product Marketing, Forge

Andrew, let's move on from valuations a little bit and talk about one of the more idiosyncratic elements of the private market, which is the presence of the right of first refusal or ROFR. Essentially, when a private company shareholder looks to sell their stock to a third-party buyer, the company typically retains a right of first refusal for a set period of time, around 30 days, to step in and buy the stock back at the price, negotiated by the buyer and the seller.

If the company waves that right, the seller can proceed to sell that stock to the buyer at the negotiated price. And Forge tracks this metric very closely as a result of all the trading that takes place on our platform. Now, we have access to pretty unique data here to help illustrate the state of private markets through the lens of how often rights of first refusal are being exercised. So, what is this data telling us about the market right now?

Andrew AldenSenior Director of Quantitative Analytics, Forge

I love this question.

For a few months now, there's been talk internally here at Forge, and externally as well, that we're seeing a pickup in the number of companies ROFRing trades. So, I was very interested to dive into this data a little bit deeper.

And sure enough, what we're seeing is a significant uptick in the percentage of companies which are ROFRing trades in Q1. And just a quick side note on why Q1 and why there's no Q2 data here. It's because settlement takes time. So, a lot of the Q2 trades are still in the midst of the settlement process.

And we won't have the complete ROFR picture on those until sometime in Q3. So, in this Q1 period, it's trades executed in Q1, but settling in Q1 or into Q2. So, what does all this mean? More than anything, I think it means insiders believe there's value at current prices. And this could be for a couple of reasons. The company could be trading cheaply relative to the opportunities the insider is seeing, or it could be that they know of upcoming plans to unlock shareholder value.

Such as an exit or new funding round at a more attractive terms. And they want to buy shares ahead of that event. So, ROFRs are often seen by investors as a bullish indicator on a company. Does this mean a company is inherently cheap relative to others in the market? No, not necessarily. We actually looked at that as well. Although it's not presented in this report, companies that ROFR are not doing it at materially cheaper prices than other companies are trading at. They're most often doing it at the going fair market price is just that insiders are seeing value at that price.

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