Term Sheet: No Shop Agreement

As an entrepreneur, the way to get the best deal for a round of financing is to have multiple options.  If you’ve been a studious reader of our term sheet series, you are painfully aware that there are many other terms – beside price – that help define what “the best deal” actually is.  However, there comes a point in time where you have to choose your investor and shift from “search for an investor” mode to “close the deal” mode.  Part of this involves choosing your lead investor and negotiating the final term sheet with him.

A “no shop agreement” is almost always part of this final term sheet.  Think of it as serial monogamy – your new investor to be doesn’t want you running around behind his back just as you are about to get hitched.  A typical no shop agreement is as follows:

No Shop Agreement:  The Company agrees to work in good faith expeditiously towards a closing.  The Company and the Founders agree that they will not, directly or indirectly, (i) take any action to solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from any person or entity other than the Investors relating to the sale or issuance, of any of the capital stock of the Company or the acquisition, sale, lease, license or other disposition of the Company or any material part of the stock or assets of the Company, or (ii) enter into any discussions, negotiations or execute any agreement related to any of the foregoing, and shall notify the Investors promptly of any inquiries by any third parties in regards to the foregoing.  Should both parties agree that definitive documents shall not be executed pursuant to this term sheet, then the Company shall have no further obligations under this section.”

At some level the no shop agreement – like serial monogamy – is more of an emotional commitment; it’s very hard to “enforce a no shop agreement” in a financing, but if you get caught cheating, your financing will probably go the same way as the analogous situation when the groom or the bride to be gets caught in a compromising situation.

At some level, the no shop agreement reinforces the handshake that says “ok – let’s get a deal done – no more fooling around looking for a better / different one.”  In all cases, the entrepreneur should bound the no shop by a time period – usually 45 to 60 days is plenty (and you can occasionally get a VC to agree to a 30 day no shop.)  This makes the commitment bi-directional – you agree not to shop the deal; the VC agrees to get things done within a reasonable time frame.

  • It is important to note that “no shops” are asymmetric when it comes to commitment.

    The VC will continue to shop by looking at other possible deals. Meanwhile, the entrepreneur is committing to a single VC.

    Would it be fair if the entrepreneur asked the VC to stop looking at other deals until the deal the closed?

    “No shops” may be “market” and putting a time limit on the no shop obviously helps but I think it is important to note this asymmetry.

  • Joe White

    Totally agree with Nivi. No-shops are BS for the entrepreneur/start-up and I have ALWAYS found that the VC caves on this. Take it for what it’s worth (the no-shop)….nothing. VCs are duplicitous and why in the world would you agree to not listen to terms from as many suitors as possible? Once a VC funded your company, would they ever tolerate something like a no-shop in the normal course of business (closing a deal with a prospect/client, choosing a service provider, etc., etc.)? You want a no-shop Mr. VC, give me a term sheet that I like and I will close with you ASAP.

  • tom

    if you have samples of letters of intent for M&A and VC pls send them to me

  • Gundeep Hora

    Actually, I can see where VCs are coming, even though I’m an entrepreneur. It’s the VC’s business to keep looking at other deals for the rest of their fund. If every entrepreneur started requesting that VCs only focused on a single deal at the time, VCs would have a very difficult time putting their huge fund to work in the appropriate time.

    As the article suggests, you could have the VCs agree to the no-shop for X amount of time. Hey, if your deal is so good that a VC is willing to get serious and you are getting other offers, those offers will more or less still be there even after 30, 45 or 60 days.

    Look at it this way. If you go to VC A and sign a no shop for 30 days, and then receive inquiries from VC B and VC C, you can 1. go to VC A and inform them about you getting interest from others, which will make them hurry up and close the deal and 2. if VC A skips on the deal, you can always let VC B and VC C know that you have a no shop clause in your contract, but if the deal doesn’t go through, you’ll be happy to talk to them.

    It’s a standard term with VCs, so they are all understand that as an entrepreneur you are stuck. I personally don’t see a problem with this clause at all.

  • Real VC

    VCs do not appreciate when entrepreneurs go shopping with our terms sheets – we especially do not like it when they reveal our term sheet to other VCs without our permission. It's akin to taking someone's contract and showing it to someone else to see if you can wangle a better deal. It's a newbie move and VCs do talk amongst themselves. A company did that to us once because they weren't satisfied with the valuation we gave them (which IMHO was comparatively high). Our other VC friends they went to came back to tell us about this company – and said we were too generous with our valuation. The company couldn't find better terms from other VCs in the end so they came back to us – and ended up having their valuation slashed further.

    • Sherrie

      A complaint from a VC about companies trying to "wangle a better deal" on a series of posts shining light on some the tricks and slanted language VCs put in contracts to wangle themselves a better deal. And who ends by smugly patting himself on the back for wangling a better deal.

  • Great post you got here. I’d like to read a bit more concerning that theme.

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