No-Shop Clause

A no-shop clause is a term sheet provision that restricts founders from soliciting or accepting competing investment offers during a defined exclusivity period. The period is typically 30-60 days from term sheet signing. Investors use it to protect their commitment investment (in time and diligence resources) by ensuring the deal will close with them rather than being used as leverage to attract higher offers. The clause is standard in venture term sheets but the specific terms (duration, exceptions, breakup fees) are negotiable. It's the structural constraint that turns "interested investor" into "exclusive partner during closing."

The standard structure:

Duration: typically 30-60 days from term sheet signing.

Scope: restricts founders from:

• Soliciting other investor offers.
• Sharing diligence materials with other investors.
• Discussing the company with other potential investors.
• Sometimes restricts continuing existing investor conversations.

Exceptions: typically allows:

• Communications with existing investors.
• Standard fundraising preparation activities.
• Sometimes communications with specific named investors.

Breakup provisions: if either party walks away, defined consequences.

Termination: clause expires if deal doesn't close in defined period.

Why no-shops exist:

Investor protection: investors invest meaningful time and money in diligence; no-shop ensures they're not used as price-setting leverage.

Deal certainty: enables investors to commit fully to the deal.

Standard market practice: nearly universal in term sheets.

The negotiation aspects:

Duration: shorter is better for founders. 30 days easier than 60.

Carve-outs: existing investor conversations should be permitted.

Breakup fees: if investor walks for non-founder-caused reasons, founder shouldn't be penalized.

Reverse breakup: if founder walks for legitimate reasons, breakup fee or none.

Common no-shop issues:

Excessive duration: 90+ day no-shops are non-standard.

Overly broad scope: restricting all investor conversations is too aggressive.

Asymmetric breakup terms: investor can walk freely; founder pays fees.

Hidden in fine print: founders don't read carefully and miss the constraint.

The leverage dynamic:

Pre-signing: founder has maximum leverage (can shop).

Post-signing: founder loses ability to shop; investor has more leverage on remaining terms.

This is why: founders should resolve all material terms in the term sheet before signing.

What founders get wrong: Signing no-shop clauses with unresolved material terms, then losing leverage on definitive document negotiation. The right discipline: resolve all material terms before signing; negotiate shorter no-shop duration; ensure reasonable carve-outs and breakup terms.

Related: Term Sheet · Term Sheet Negotiation · Closing Conditions · Definitive Agreement · Exclusivity Period

FAQ

What is a no-shop clause?
A provision in term sheets restricting founders from soliciting or accepting competing investment offers during a defined exclusivity period (typically 30-60 days from term sheet signing). Standard in venture term sheets.

Why do investors include no-shop clauses?
To protect their investment in diligence time and resources by ensuring the deal closes with them rather than being used as leverage for higher offers. Standard market practice that enables investors to commit fully.

What should I negotiate in a no-shop clause?
Shorter duration (30 days preferred over 60), carve-outs for existing investor conversations, balanced breakup terms (if either party walks for non-causal reasons, fair treatment), and clear termination conditions if deal doesn't close in time.