What should the terms of the no shop be?
Takeaway: No shops (also known as exclusivity provisions) are provisions in term sheets restricting the ability of the company to solicit other term sheets. The term of no shop provisions is typically 30-60 days. It is intended to approximate the amount of time it will take to close the financing.
No shop provisions are a common term contained in venture capital term sheets that protect both startups during the negotiation process. This post will provide an overview of no shop provisions, discuss their role, and suggest best practices for the terms of a no shop provision in a venture capital financing.
What is a No Shop Provision?
A no shop provision, also known as an exclusivity clause, is a term in a term sheet or letter of intent that prohibits the startup from actively seeking or entertaining alternative financing proposals from other investors during a specified period. This period, often referred to as the "no shop period," allows the negotiating parties to focus on finalizing their financing deal without the distraction of competing offers.
Why are No Shop Provisions Important?
No shop provisions are important for investors because they minimize the risk of the startup using the term sheet as a negotiating tool to secure better terms from other investors.
What Should the Terms of a No Shop Provision Be?
While the specific terms of a no shop provision can vary depending on the parties involved, the following best practices should be considered:
Duration: The no shop period should be reasonable and allow sufficient time for the parties to negotiate and finalize the financing deal. A typical duration ranges from 30 to 90 days, but this can be adjusted based on the complexity of the transaction and the preferences of the parties.
Scope: The no shop provision should clearly define the types of financing transactions and investor interactions that are prohibited during the no shop period. It should also specify any exceptions, such as ongoing discussions with existing investors or strategic partners.
Confidentiality: The no shop provision may include a confidentiality clause that prevents the startup from disclosing the terms of the financing deal to third parties. This can help prevent other investors from using the terms as a benchmark for their own negotiations.
Termination: The no shop provision should specify the conditions under which the exclusivity period can be terminated. This may include the completion of the financing deal, the expiration of the no shop period, or a mutual agreement by both parties to end the exclusivity.
Conclusion
No shop provisions are commonly used in venture capital financings by ensuring that investors can negotiate and finalize their deals without distractions or competitive pressures. By carefully considering the terms of a no shop provision, including duration, scope, confidentiality, and termination, investors can protect their interests and foster a collaborative and successful financing process.