Exclusivity clauses – balancing deal certainty and founder flexibility

In venture capital transactions, exclusivity clauses are a common feature of term sheets, designed to protect the investment process and ensure that negotiations proceed without interference from competing offers.

For investors, exclusivity provides deal certainty, preventing founders from seeking alternative funding once negotiations have commenced. For founders, however, exclusivity must be carefully managed to avoid undue restrictions that could limit their options if the deal falters.

This article in our ‘Anatomy of a term sheet' series examines the purpose of exclusivity clauses, how they are structured in venture capital deals, and their implications for founders and investors.

What is an exclusivity clause?

An exclusivity clause, sometimes referred to as a “no-shop” clause, is a contractual commitment by the founders (and sometimes the company) to refrain from soliciting or negotiating alternative offers for investment during a defined period. 

An exclusivity clause ensures that the investor has the sole opportunity to complete due diligence and negotiate the final investment agreement without risk of being outbid or disrupted by other parties.

Key features of exclusivity clauses

Duration of exclusivity

• The clause specifies a fixed period, typically ranging from 30 to 90 days, during which the founders agree not to engage with other potential investors.
• The duration should strike a balance between providing the investor enough time to complete due diligence and finalise the deal, while avoiding unnecessarily long restrictions on the founders.

Scope of restrictions

• Exclusivity clauses usually prohibit the following:
  
  • Soliciting alternative offers for funding.
  • Engaging in discussions or negotiations with other potential investors.
  • Sharing confidential information with third parties.
• The scope should be carefully tailored to ensure it is reasonable and does not restrict the company from exploring unrelated commercial opportunities.

Obligations of the investor

• Exclusivity clauses often include reciprocal commitments from the investor, such as completing due diligence or advancing the deal in good faith within the exclusivity period.

Break clauses

• Some exclusivity clauses allow the founders to terminate the exclusivity if the investor fails to meet specific milestones, such as completing due diligence or issuing definitive documentation by agreed deadlines.

Rationale for exclusivity clauses

For investors

• Protection of time and resources: ensures their time and resources are not wasted on a deal that founders might abandon for a better offer.
• Focus on due diligence: provides a distraction-free environment for completing due diligence and negotiations.
• Avoiding competitive tension: prevents founders from leveraging the investor’s term sheet to negotiate better terms with others.

For founders

• Commitment from the investor: an exclusivity clause signals that the investor is serious about completing the deal.
• Reduced pressure: avoids managing competing negotiations, allowing founders to focus on advancing the deal with the chosen investor.

Negotiating exclusivity clauses

Duration and scope

Founders should negotiate a reasonable exclusivity period that aligns with the complexity of the deal. For example:

• Early-stage deals: a shorter exclusivity period (e.g., 30 days) may suffice due to simpler due diligence and documentation requirements.
• Later-stage or complex deals: longer periods (e.g., 60–90 days) may be needed to account for more detailed due diligence and legal negotiations.

Carve-outs and exceptions

Founders may seek carve-outs to ensure the exclusivity clause does not unnecessarily restrict their flexibility:

• Existing discussions: exclude investors with whom discussions were ongoing before the exclusivity period commenced.
• Unsolicited offers: allow the company to receive and evaluate unsolicited offers, provided they do not actively solicit them.
• Strategic partnerships: ensure the clause does not restrict unrelated commercial discussions or partnerships.

Break clauses

To balance the restriction, founders can include break clauses that allow them to terminate exclusivity if:

• The investor fails to meet agreed milestones, such as providing a draft investment agreement or completing due diligence within a set timeframe.
• The investor introduces material changes to the agreed terms without justification.

Practical considerations for founders and investors

Reasonable timeframes

The exclusivity period should reflect the complexity of the transaction. Investors may require longer periods for later-stage or cross-border deals, but founders should push back on excessively long restrictions that could hinder their ability to raise capital.

Ensuring good faith

Both parties should commit to advancing the deal in good faith during the exclusivity period. This might include setting clear timelines for due diligence and document negotiation.

Avoiding overreach

The clause should focus narrowly on equity fundraising discussions, avoiding unnecessary restrictions on unrelated commercial activities.

Documenting mutual commitments

Investors should reciprocate the exclusivity commitment by agreeing to timelines for key actions, such as completing due diligence or providing term sheet updates.

Analysis: founders’ perspective vs investors’ perspective

In summary

Exclusivity clauses are an essential feature of venture capital term sheets, providing investors with certainty while allowing founders to progress towards a deal without unnecessary distractions. 

By negotiating reasonable timeframes, clear carve-outs, and mutual commitments, founders and investors can create an exclusivity framework that balances certainty with flexibility, supporting a smooth and collaborative investment process.

Read the next article in our "Anatomy of a term sheet" series, where we’ll explore diversity, equity, and inclusion clauses and examine how these provisions reflect the growing importance of ESG considerations in venture capital deals. 

If you're navigating the complexities of venture capital term sheets or preparing your business for investment, our experienced team is here to help. Get in touch to discuss how we can support you in securing the right deal for your business.