A "no-shop" provision says that, once the term sheet is signed, the company won't look for other investments or negotiate with other investors. No-shop provisions are typical in deals with sophisticated investors, who won't want to spend time or money looking into your company if you are out looking at other options. Founders should try to get a reasonable no-stop provision that doesn't tie up their options if investors aren't efficiently completing a deal. Here are some reasonable limits for a no-shop provision:

Limit the Time Commitment. The easiest way to limit the impact of a no-shop provision is to agree on a reasonable time frame for investors to complete the investment. In a typical VC financing, it takes about six weeks to conduct diligence and hammer out the final deal documents, so a 45-day no shop is probably reasonable. A good rule of thumb is 30 days on the low end and 60 on the high end. Brad Feld makes a good point: if the entrepreneur is committing not to shop the deal, the investors should commit to getting the deal done in a reasonable time frame. //www.feld.com/wp/archives/2005/08/term-sheet-no-shop-agreement.html

Don't Agree to a Break Fee. A break up fee is a fee (referred to as "liquidated damages") that the company pays to investors if it breaches the no-shop provision and closes a deal with someone else. Break up fees are rare in early-stage financings, give investors unnecessary leverage, and make it risky to take another investment quickly. Make clear that you'll respect a reasonable no-shop provision, and that a penalty isn't appropriate.

Ask for Notice if the Investor Isn't Going Forward. It's reasonable for the company to ask for investors to promptly notify the company if the investors decide to back out of the deal, and to let the company out of the no-shop so it can look for other investors. Having the first group pass has probably done plenty of damage to the company's prospects, so there's no point in dragging it out.