Know Your Limits: Understanding Your Term Sheet’s Exclusivity Provision

By Stephanie Evans and Tim Hultzman

Hollywood’s exclusive parties include only the hottest A-listers. Exclusive sales are advertised only to a boutique’s biggest spenders. The world has its own take on exclusivity: Investors and buyers routinely insert an “exclusivity provision” into of companies they’re looking to fund or buy.

Potential investors and acquirers need time to evaluate a business’s potential before they commit. They almost always insist on some legally binding period of exclusivity, a window of time during which the company and its founders agree not to solicit other potential suitors or entertain other .

Before you sign a , review the exclusivity provision and consult with your attorney about whether to negotiate any changes (more on that below).

How long does exclusivity last?


The refrain that every is unique and every deal is different bears repeating here.  And exclusivity should follow suit—it should correspond with the unique features of your deal and company.

A straightforward round of financing for an early-stage company is a relatively simple process. If that’s your scenario, a few weeks to a month of exclusivity is about right. If needed, you can always sign-off on short extensions. On the other end of the spectrum, the detailed required in an acquisition of a company that has been operating for many years could take weeks, so a longer period (such as 45 to 60 days) wouldn’t be out of line. A shorter period is better for the company, and you can always agree to extend the period if the investor/buyer is proceeding in good faith.

When considering the exclusivity period, yourself:  How much time does a motivated investor or buyer need to get comfortable with the business, and how comfortable are you that your hands will be tied during that time period, when you could be talking with other investors or buyers?

Ending Conditions?

Sure, exclusivity will stop at the end of the period you and your company’s potential investors or acquirers decide on.  But there are other conditions that might be grounds for termination. For instance, if the prospective buyer decides not to go forward before the deadline, exclusivity shouldn’t continue.

If your is a highly desirable target, you may have enough to call the shots. Give your potential investor or buyer a few weeks to complete and to come up with the purchase price. If they’re unable to do so by then, exclusivity ends and you’re free to shop.

A middle ground is to create a timetable with milestones that move the deal toward a close. This allows both parties to see progress (or the lack thereof) and reassess their commitment.

How broad is the exclusivity provision?

Who has to comply?

The prospective buyer’s ideal exclusivity provision is as comprehensive as possible. It covers everyone connected to your , including founders, board and even and employees, barring them all from encouraging, seeking or soliciting other .

But are you really planning to consult each and every one of your employees about a financing or acquisition? Probably not. That information should be confidential and limited to a select few—and, in fact, this is also in the investor’s or buyer’s interests. Restricting the number of people who know about the ’s existence is an excellent way to protect the process and keep your employees focused on their work, not their future. Here, think: Who needs to know or will likely find out? When you have an answer, do your best to make sure that people who fall outside of that category aren’t covered.

What does it apply to?

Investors may include broad language prohibiting you from “soliciting, encouraging, entertaining or discussing” other during the exclusivity period.  So what happens if your friend who happens to work for a venture firm you how you and your company are doing and you say, “great—the company is growing and really taking off”? Did you just encourage an in violation of the exclusivity restriction? Perhaps you did. To avoid any claim like that, scrutinize any broad or ambiguous language, assume that it will be applied to your detriment and to have it deleted or toned down.

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When mulling changes to a , remember your priorities and pick your battles. You likely won’t eliminate an exclusivity period entirely, but you should be able to reach agreement on one that gives the investor or buyer time to consider your company without locking you up for too long.