A no-shop clause is a contractual provision in a term sheet or letter of intent that prohibits a company from actively seeking, soliciting, or negotiating with other potential investors for a defined period, typically 30 to 90 days. This clause protects the investor's time and resources invested in due diligence by ensuring the company remains committed to closing the deal during negotiations.
Why It Matters
For investors, a no-shop clause reduces the risk of being used as leverage in a bidding war or having another party swoop in after they've invested significant time and money in due diligence. The clause creates a window of exclusivity that allows both parties to focus on negotiating deal terms and completing legal work without external distractions. However, founders should recognize that agreeing to a no-shop doesn't guarantee the deal will close—the investor can still walk away if due diligence reveals problems—which is why most experienced founders negotiate for shorter periods and carve-outs that allow them to respond to unsolicited offers.
Example
A Series A investor offers a SaaS startup $5 million at a $20 million pre-money valuation with a 60-day no-shop period. During this time, another VC approaches the founder with interest in leading the round at potentially better terms. Because of the no-shop clause, the founder cannot actively engage with this new investor or share confidential information. However, the founder negotiated a "fiduciary out" provision allowing the board to consider unsolicited superior offers if their fiduciary duty requires it. After 45 days, if the original investor hasn't moved forward with binding documents, the founder can renegotiate the no-shop terms or let it expire and explore other options.
Related Terms
Understanding no-shop clauses connects to other deal protection mechanisms like Exclusivity Period, which defines the timeframe during which negotiations occur without competition, and Term Sheet, the non-binding document where no-shop provisions typically appear. Investors often pair no-shop clauses with Break-Up Fee provisions that compensate them if the company violates the agreement and accepts another offer.