What Is A No Shop Clause in Startups Deals?

Michał Kowalewskiby Michał Kowalewski • 7 min readpublished October 14, 2023 updated December 4, 2023
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In the realm of startup financing, various agreements and clauses come into play to ensure a smooth transaction between investors and entrepreneurs. One such crucial agreement is the No-Shop Agreement. This agreement is a common feature in discussions between investors and startups, aiming to secure a fair deal for both parties involved.

In this article we’re going to go over:

  1. What is a no-shop clause
  2. Why do investors insist on no shop provisions
  3. What are the key elements of no shop agreements
  4. Exceptions to the no shop clause
  5. Benefits and Drawbacks for Startups
  6. Case studies
  7. Best Practices for Startups

What is a No-Shop Clause?

A no-shop clause is a provision in a contract, often seen in mergers and acquisitions, which prohibits one party, typically the seller, from seeking or considering offers from third parties for a specified period. This clause ensures that the selling party does not entertain other offers while negotiations are ongoing with a potential buyer.

Why Do Investors Insist on No-Shop Provisions?

  • Exclusivity: Investors, especially in the competitive startup financing realm, seek exclusivity when they spot a promising venture. A no-shop agreement ensures they have exclusive rights to negotiate, reducing the risk of losing the opportunity to a competing offer.
  • Resource Commitment: Due diligence is a resource-intensive process. Investors spend considerable time, money, and effort evaluating a startup's potential. The agreement ensures their resources aren't expended in vain.
  • Price Protection: Without a no-shop clause, startups might be tempted to use existing offers as leverage to drive up valuations with other potential investors. The agreement curbs this, ensuring price protection for the initial investor.

Key Elements of a No-Shop Clause

  1. Exclusivity: The primary purpose of a no-shop clause is to ensure that the seller does not entertain offers or engage in negotiations with other potential buyers for a specified period.
  2. Duration: The clause specifies a time frame during which the seller cannot seek or entertain other offers. This period allows the initial buyer to complete due diligence and finalize the deal.
  3. Notification Requirement: If the seller receives unsolicited offers from other parties during the no-shop period, they are typically required to notify the original buyer about such offers.
  4. Scope of Restriction: The clause will detail the extent of the restriction, specifying activities the seller is prohibited from, such as initiating discussions, providing confidential information, or even entertaining informal talks with potential buyers.
  5. Penalties for Breach: The consequences for violating the no-shop clause are outlined, which could include financial penalties (break-up fees) or other remedies to compensate the original buyer for potential damages.
  6. Binding Nature: The clause is legally binding, ensuring both parties are obligated to adhere to its terms once it's agreed upon.
  7. Termination Conditions: The clause will specify the conditions under which it can be terminated or will naturally expire, such as after a particular period, upon the occurrence of a specific event, or if both parties mutually agree to end it.

Exceptions to the No Shop Clause

  • Go-Shop Provisions: This allows the seller to actively seek and entertain offers from third parties for a specified period after the initial agreement is signed. It provides the seller with a window to determine if there are better offers available in the market.
  • Window Shop Exceptions: While the seller cannot actively solicit other offers, they are permitted to engage in discussions with third parties who make unsolicited offers. This ensures that if a significantly better offer comes along, the seller can consider it.
  • Fiduciary Out: This provision allows the seller's board of directors to entertain and possibly accept a superior proposal if they believe that rejecting such an offer would breach their fiduciary duties to the shareholders. It ensures that the board can act in the best interest of the shareholders, even if it means violating the no-shop clause.
  • Right to Inform: Some no-shop clauses allow the seller to inform the initial buyer of any unsolicited offers they receive during the no-shop period, without it being considered a breach of the clause.
  • Superior Proposal Exceptions: If an unsolicited offer is significantly better than the initial offer, the seller might be allowed to consider it, especially if it's in the best interest of the shareholders.
  • Material Change in Circumstances: In rare cases, if there's a significant change in the circumstances of the seller (like a sudden financial downturn), they might be allowed to entertain other offers.
  • Pre-Existing Discussions: If the seller was already in discussions with another potential buyer before the no-shop clause was agreed upon, they might be allowed to continue those discussions.
  • Public Company Exceptions: Public companies might have certain regulatory obligations or shareholder responsibilities that allow them to entertain other offers, even if a no-shop clause is in place.
  • Break-Up Fee Agreement: In some cases, the seller can entertain other offers if they agree to pay a break-up fee to the initial buyer. This fee compensates the initial buyer for the time and resources they invested in the deal.
  • Termination of Initial Agreement: If the initial agreement with the buyer is terminated for any reason, the no-shop clause might also be rendered void, allowing the seller to entertain other offers.

It's essential to note that the specifics of these exceptions can vary based on the terms negotiated between the buyer and seller and the jurisdiction in which the agreement is made.

The Double-Edged Sword: Benefits and Drawbacks for Startups

While no-shop agreements offer clear advantages for investors, they present both opportunities and challenges for startups:

  • Benefits

1. Good Faith: Agreeing to a no-shop clause signals to investors that the startup is serious about the negotiations and is not merely "window shopping" for the best deal.

2. Streamlined Process: With distractions out of the way, startups can focus on one investor, potentially speeding up the financing process.

  • Drawbacks

1. Lost Opportunities: The dynamic nature of the startup world means better offers can come at any time bound by a no-shop agreement might mean missing out on these potentially more lucrative or favorable deals.

2. Reduced Negotiation Power: With the startup committed to not seeking other offers, they might find themselves in a weaker position to negotiate terms, especially if the initial deal doesn't align with their expectations.

3. Potential Stagnation: If the deal with the initial investor falls through after the no-shop period, the startup might find itself at a disadvantage, having lost time and other potential investment opportunities.

Case Studies: The Real-World Implications of No-Shop Clauses

Tech Giants and No-Shop Clauses.

When Microsoft was in talks to acquire LinkedIn, their agreement included a no-shop clause with a substantial break-up fee of $725 million. This example underscores the weight and seriousness of such agreements in high-stakes deals.

Startups and Changing Tides.

In another instance, a budding tech startup, while in a no-shop agreement with a potential investor, received an unsolicited and significantly better offer from another venture capital firm. Bound by the agreement, the startup couldn't pursue the new opportunity, leading to tensions and prolonged negotiations with the initial investor.


The no-shop clause plays a pivotal role in business transactions, ensuring that both parties can negotiate in good faith. While it offers protection to buyers, sellers must be diligent in understanding the terms and implications of the clause. As with all contractual provisions, it's essential to seek legal counsel to ensure that the interests of all parties involved are adequately protected.

Startup Financing Terms
Michał Kowalewski

Written by Michał Kowalewski

Writer and content manager at Capbase. Passionate about startups, tech and multimedia. Based in Warsaw, Poland.

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