In this video, you'll learn what the No Shop Provision in the VC Term Sheet means.

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Basically the venture capitalists who are giving you a term sheet, they've spent a ton of time, money, political capital to get you a term sheet and they're excited about doing a deal. So they're shifting into sales mode once they give you that term sheet, and the last thing they want is for you to take that term sheet and walk up and down Sand Hill Road or in New York or wherever you're based and get a better deal using that term sheet as leverage. It's social proof. They're giving you a term sheet. There's a lot of money involved and they want you to consummate the deal. They want you to work with them.

And so often, almost always in a VC term sheet, there will be some type of no-shop provision, and basically what this means is the management team of the startup who's negotiating this term sheet is not able to take this term sheet and actively shop it. Furthermore, if they get inbound interests, whether there's acquisition or just another round, another VC fund, they're supposed to disclose that to the investor syndicate they sign the term sheet with. Now, one of the most important things here is that, for it to be effective, you actually have to sign the term sheet. So what you kind of practically see is founders getting a term sheet, and then aggressively, but discreetly, shopping that term sheet for a week or so with other VC firms to try to get everyone up to whatever deal terms they want, or to get the firm they really want to work with to give them a term sheet. That gets into exploding term sheets.

Usually venture capitalists give you like a week or so for a term sheet still to be good. Any shorter than that, it looks a little desperate. Any longer than that, it's just kind of asking for the term sheet to be shopped. So that's in another video, called "Exploding Term Sheets". But for our purposes, you usually see like a no-shop period, kind of one to three months. I would highly recommend not agreeing to a long no-shop, because it can actually create some really negative incentives for the VC fund, especially if you're running out of cash.

So just to kind of play this forward here, say you sign a term sheet, has a long no-shop, has a three-month no-shop. That's a long time. And the VC firm knows you're kind of getting low on cash. Well, guess what. They may try to let the no-shop get all the way to the end and exert a ton of pressure on you and try to re-trade the deal because they know you're almost out of cash. And so you can end up with a really kind of negative, they-have-all-the-leverage type of thing.

Now you might say, well, hey, I have a lot of cash. I don't have to worry about that. But still, you don't want a long no-shop, because when you go out and create like an auction to generate term sheets from investors, you're fresh, they know you, they know what's going on, and when you elect to sign a term sheet with another firm, you immediately become kind of like, it's a negative signal to all the other VC firms. You didn't pick them. It's like picking someone else to go to the dance, the prom. Well, are the other guys or girls going to want to go with you if that date ditches you? Probably not.

So what happens is, if that no-shop runs out and it's a long no-shop, your company can be stale. They might just not want to even re-engage with you. Furthermore, you probably spent a lot of time on this fundraise, and oftentimes what we see is, companies, when they're, the founders can only do so many things, there's only so many hours in the day, and so the performance of the company in the very short-term, when they're negotiating these terms sheets and getting everything done, will suffer a little bit. If you just think about it, you're not calling on customers as much. You're not recruiting new people as much. You're spending a lot of time with the venture capitalists.

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