# No-Shop Agreements - Author: Joichi Ito - Date: 2003-06-05T08:25:16Z A few people have questioned my assertion that no-shop agreements make sense. I'd like to clarify my position. I do agree that in some cases, they don't make sense, but here's where they make sense. Basically, my point is that if you decide that you like each other and REALLY want to work together but that it will take a lot of work before the actual transaction happens, a no-shop allows both parties to focus on building the business. It's like an agreement that after two people are engaged, you both don't date anymore. Obviously, if you're not sure you have the right partner, you shouldn't sign a no-shop. As a VC, if we have a no-shop we feel much more comfortable putting a lot of work on helping the formation of the business plan, introducing the company to partners, other investors, advisors, possible employees, paying for their legal fees, etc. Another situation where I have found no-shops to make sense are in cases where you can just SEE how an auction could end up taking A LONG TIME. I am not at liberty to disclose the actual transaction, but I once had a buyer for a company where I had a no-shop. The investment banker broke my no-shop and shopped the company around after I made my offer. I didn't want to deal with the auction so I dropped out. The auction took months and they ended up getting LESS money for the company because they didn't find a better buyer and I didn't want the company any more because the value of the company degraded during the process because everyone was spending all of their time "being shopped around." I've also signed a no-shop as an entrepreneur. I was talking to a variety of VC's. They were all pitching me on why I should work with them. I ended up choosing one VC, signed a no-shop and we were able to close and fund in 1 month. Without the no-shop I think it would have taken much longer. I think that in the "clubby" Silicon Valley VC community where everyone's friendly with everyone else, maybe no-shops are not very common. Also, where you are quite confident about your business and don't need much help, just money, maybe shopping it around and raising money from the highest bidder makes sense. A no-shop doesn't mean that other investors can't come in. It just means that other investors should talk to the lead investor. It just means you stop taking cold-calls from random investors who hear that a deal is happening. It also means that you don't go looking for another investor for the sake of negotiation. Joel on SoftwareA no shop is sometimes called an exploding term sheet. It means that the company must either accept the deal on the spot or it won't get funded at all. The theory is, we don't want you going around to other VCs trying to get a better deal. It's common among the second-tier VCs, but the best VCs are usually willing to stand on their own merits.Our no-shops are not about forcing people to take the deal on the spot. It's so that we can invest a lot of time adding value before we finalize the deal. I guess the best VC's say, "Come back when you have a real business. Don't look to us for help." ;-) (Half kidding here. Many top tier VC's have Entrepreneur in Residence systems and other ways to help entrpreneurs before they invest, but you definitely have to be in the club before they'll lift a finger for you.) Andrew over at VentureBlog also disagrees with my position on no-shops. --- #### Categories Venture Capital