Founder Freedom vs. Investor Protection: The Role of No-Shop Clauses
- Ekta Jhaveri
- Apr 2
- 3 min read
Corporate & Commercial Series
Series 2 | Article 1
Imagine a founder accepting a promising deal on Shark Tank, only to ghost the investor later. Shark Tank India judges have openly shared instances where the founders re-negotiate deals or disappear after accepting the deals on the show, likely in pursuit of better opportunities. Even in the broader industry, nothing stops founders from shopping around once they receive a term sheet. Such actions of the founders create uncertainty and waste the investors’ time and resources dedicated to negotiate the deal and perform the due diligence that takes place prior to entering definitive documents.
Is it legally valid for founders to explore other options after signing a term sheet? The simple answer is yes, as term sheets are generally non-binding. So, how can an investor protect their interests? In this article, I’ll discuss how investors deal with such scenarios.

Exploding Term Sheet v. No-shop Clause
To discourage founders from exploring alternative offers, some investors include an expiration date in their term sheets, making the offer valid only for a limited period. The founders often refer to such term sheets as “exploding term sheets”. While the expiration date can pressure the founders to decide promptly, determining the timeline may be tricky. A very short validity period may not be sufficient for the founders to make a decision and may also limit the investors' ability to complete their due diligence effectively. Conversely, a longer validity period undermines the purpose of setting an expiration date altogether. A more practical and preferred approach is to include a “no-shop clause” in the term sheet.
No-shop clause: Definition, Purpose, & Scope
A no-shop clause (commonly referred to as an “exclusivity clause”) is a binding provision in a term sheet that restrains the founders from soliciting or engaging in discussions with other investors for a defined period, typically lasting 30 to 60 days from the date of signing the term sheet.
The primary purpose of a no-shop clause is to provide the investors a window of time to conduct due diligence, negotiate definitive terms, and finalise the transaction documents without the risk of competing offers or having their terms used as leverage by the founders.
The scope of a no-shop clause can vary for each transaction. A no-shop clause may restrict formal and/or informal discussions, solicitations, or even consideration of unsolicited offers. In some cases, the founders may be required to notify the investors if they receive any unsolicited offers or inquiries from other potential investors. It will also clearly set out what actions constitute a breach and the consequences for such breach.
A no-shop clause often goes hand-in-hand with a confidentiality clause, adding an extra layer of protection to safeguard the terms of the deal from being disclosed. In some cases, the confidentiality clause may also restrict the founders from announcing that they have received an offer from the investors, preventing any unintended competitive or reputational effects.
What if a founder commits a breach of the No-shop Clause?
The consequences for breach of a no-shop clause may include the termination of the term sheet, and/or damages to compensate the investors for the financial costs incurred by them. The damages payable for breach of the no-shop clause may also be referred to as “break-up fee”. The consequences for breach are included in a no-shop clause to provide financial protection for the investors and deter any actions that undermine the exclusivity of the agreement.
Conclusion
The no-shop clause is a vital tool for investors, ensuring exclusivity and protecting their interests during the negotiations. By restricting founders from seeking other offers, it provides time for thorough due diligence and prevents wastage of resources. It also shields investors from competing offers and increases the likelihood of a successful transaction. Ultimately, a no-shop clause gives investors the security needed to close deals smoothly and effectively.
About the Author
Ekta Jhaveri has been with MZD Legal Consultancy and practicing law since 2016. Ekta is a part of the Transaction Advisory; Technology; and General Corporate teams at MZD Legal Consultancy. She can be contacted at ekta@mzdlegal.in
About MZD Legal Consultancy
MZD Legal Consultancy is a boutique law firm in Mumbai, India. The firm was established in 2011 and comprises professionally qualified lawyers with varied levels of experience and expertise in specific practice areas. To know more, click here www.mzdlegal.in