NOTE: This is the eighteenth post in our series about standard terms in early stage equity financings. These posts refer to the model Series A Term Sheet put out by the National Venture Capital Association (NVCA) and available for download here.
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Way back in our discussion of the Summary of Offering Terms, we noted that the 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. It is also the last provision of the NVCA term sheet we will cover in this series of posts as the other two provisions – “Existing Preferred Stock” and “Expiration” – are not negotiated terms.
The implications of both portions of the No Shop/Confidentiality provision are 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. The “Confidentiality” portion prohibits the company from disclosing the terms of the term sheet, except on a need-to-know basis. 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 (in this blogger’s experience). If the No Shop is shorter than 45 days, there’s a good chance it will expire before the transaction closes. A No Shop greater than 60 days allows the transaction to drag on too long. Once the term sheet is signed, both sides are usually anxious to get the transaction closed as quickly as possible.
Note that the NVCA term sheet includes an optional “break-up” fee in the event the No Shop provision is breached, but also notes that including such a fee is uncommon and generally only used in later-stage financings.