Off late i have come across couple of instances where VCs have not invested after signing the term sheets and really put startup and entrepreneur in back foot by their ‘No Shop‘ clause in the term sheet. Signing a term sheet with a no shop agreement is likely to send you back a month or more if the VC doesn’t end up funding the company. I can see the insistence of no shop language in larger M&A deals but see no place for them in early stage rounds.
So what is a No Shop Clause?
In simple words ‘No shop’ clause, prohibits the entrepreneur from speaking to other investors while the VC completes his due diligence.
No Shop/Confidentiality provision is one of the two provisions in the term sheet that is usually “binding” on the company and the investors – meaning it is enforceable even if the rest of the contemplated financing is never completed.
The implications of the No Shop provision are very straightforward. The “No Shop” portion requires the company to refrain from actively pursuing any other investment or any sale of the company for a set period of time after the term sheet is signed. Most of the time the only point of negotiation is the length of the No Shop period. This ranges from 30 to 90 days, but is typically 45 or 60 days. Once the term sheet is signed, both sides are usually anxious to get the transaction closed as quickly as possible.
This is an important issue because if your VC walks away after you sign the term sheet (which happens from time to time), your company may be considered damaged goods and it will be difficult for you to find another investor. Accordingly, if you get any indication that your VC is getting cold feet, you want to be able to move quickly to re-kindle discussions with other investors, if possible.
If you believe in your startup and aiming at large market and have a lot of leverage (such as many VCs interested in your company), you may be able to knock this provision out entirely. Remember: every clause in a termsheet is negotiable.