Entrepreneur’s View of Serial Monogamy

Serial monogamy needs to be mutual.

Super VC Brad Feld has been running an excellent series of posts on term sheets between VCs and startups. Usually I agree with Brad even though that all my experience comes from the opposite side of the negotiating table.  But I disagree with part of what he blogged about the “no shop” clause here today.

The standard no shop clause as Brad accurately quotes it provides that the company can’t look for other investors for a period of thirty to forty-five days.  Brad calls this “serial monogamy” while the final deal is being negotiated and says that this is bidirectional because the VC is agreeing to act expeditiously and try to get the deal done within the window. 

This is actually unilateral monogamy since the VC is still free to look at providing financing to competitors of the company during this time.  The company is usually extremely vulnerable in this period – perhaps running short on cash.  If the VC doesn’t act expeditiously, the company will probably just grant an extension rather than start over with new VCs.  And the company is providing information about its plans and business to the VCs which even the most ethical VCs won’t be able to erase from their memories if they end up investing in a competitor.

My advice to entrepreneurs on this clause is to say politely and firmly “what is sauce for the goose is sauce for the gander.” The no shop should prohibit the VC from entering into financing discussions with competitors broadly defined of the company during the exact same period when the company can’t talk to other investors.  If your VC won’t agree to this, don’t hesitate to ask what discussions they are engaged in

In general it is good negotiating advice to make sure that every clause which can be mutual is mutual.  Often this technique helps in reaching agreement.  For example, with a truly mutual no shop neither party will want it to be very long and both have a strong incentive to complete negotiation quickly.

Full disclosure: I think I signed a term sheet with unilateral no shop myself and I was NOT burned.  This is not the most important term in the price sheet but it is worth pushing back on.

I posted ten lessons I learned about working with VCs here and here.

Comments

[Jeremy]

Brad-- Sorry I wasn't clear on this issue. I was referring to founders losing their unvested shares when they are terminated without cause.

[Brad Feld]

Abby - my trackbacks are flaky sometimes - this one didn't work for some reason. I think Tom's comments are great - I'm about to post a reply to it.

Jeremy - I'm not sure that I've ever said this. Can you point me to it? I've written extensively on vesting - it's certainly possible for founders to be terminated without cause and lose their UNVESTED shares, but whatever they've vested will be theirs. Of course, if the company isn't successful, these shares are worthless. In addition, if the company struggles, the company may raise money at a low valuation, also rendering these shares relatively worthless. But - all of that is different from being fired and losing all of your shares.

[Abby]

I'm surprised that this post didn't show up in Brad's trackback link.

[Jeremy]

Tom,

Brad also says that founders can be terminated without cause (and lose all of their shares for no reason). Is it normal for entrepreneurs to agree to such terms?