Fundraising: No-Shop Agreements
We'll see if I have the ability to write a short post on this blog. If there were ever an opportunity, here it is. Some VC's will ask entrepreneurs to sign a no-shop agreement as part of signing a term sheet. As usual, Brad Feld has thoroughly dissected the VC perspective on no-shops and I found this follow-up to his own initial post on the subject to be a very worthwhile read.
First, the very basics. Signing a VC term sheet with a no-shop clause basically means that you, the entrepreneur, will not continue to look for other investors to fund your company on favorable terms while you and the investor behind this term sheet hammer out your final agreement. Since the time between term sheet and closing the financing can be 30-60 days, you are obviously very committed to getting this deal done. Note that there is a wide range of VC behavior and you'll hear stories that run the gamut from assorted entrepreneurs. Most no-shops have a time limit associated with them like 30 days.
Here's my general thinking on no-shop agreements. I don't think you should sign no-shops for your A round, but I care less about them as the company progresses and you raise later rounds. I wouldn't sign one during the A round because during this time, you are spending an inordinate amount of time on financing. It's a full-time job for the CEO. Because you need money to really make progress, the no-shop on an A round really backs you into a corner. You *have* to get the deal done, because you need the cash to make progress, and thus, you are much more vulnerable to a potential investor trying to trade down on you as you progress...there can be any number of reasons/excuses for trying to retrade the deal, but all of them are bad for the entrepreneur who's signed a no-shop on an A round deal. So, all things being equal, I think signing a no-shop agreement on an A round is a bum deal for the entrepreneur.
In later round deals, eh, I don't care so much about this term for a couple reasons. First, I like to raise money when we don't need it (yes, I realize i wrote "I....we....". So shoot me). By getting out and doing a round when you don't need the money at all but know that you will 6-8 months down the road, you can be patient and aggressive and try to build the syndicate you want (yes, I realize I've now switched to the second person...enjoy the roller-coaster that is my lousy writing education). Where were we....Secondly, since you have money in the bank and you're growing the business, in theory, things should be getting better and better on a month to month basis. If the investor tries to re-trade the deal on you while you're under no-shop, you are in a lot better position in this later round situation than you are in an A round. Walk away from the deal if they try to retrade it and once the no-shop expires, start working with others.
The challenge with this advice is that if you're in a position of strength in a B or C round, it's probably easier to get the no-shop removed in the first place anyway, but nonetheless, I generally think it's something to avoid in an A round where you don't have a good feel for the investor's track record on these things, and something to be less concerned about in a later round as long as you've got money in the bank, you're growing well, and you've given yourself loads of time to get a financing done well ahead of the need.
Full disclosure - I have never signed a financing term sheet with a no-shop, so I couldn't tell you much about how hard these are to negotiate out. Other full-disclosure, every time I write "I" in this blog, I generally mean "me and the other cofounders and members of the executive team", but "I" feels so much more rewarding, you know?
Not such a short post after all.