Earlier this week I did a brief post on the “no shop agreement” that is a common feature in a term sheet.  I compared signing a no shop to the construct of serial monogamy in a relationship.  I had a couple of comments (one that was intellectual, one that was a little harsher and painted VCs as “duplicitous.”)  I was mulling over my obviously (in hindsight to me) asymmetric view when Tom Evslin very clearly and coherently articulated why my analogy was really unilateral monogamy (e.g. the VC isn’t signing up for serial monogamy – only the entrepreneur is.)

Tom – and the comments I received – are correct (although I don’t agree with the generalization that “VCs are duplicitous.”)  After reading Tom’s post, I thought about my own behavior (at least my perception of my own behavior) vs. the general case and realized I’ve mixed the two up.  I’ve been on the giving and receiving side of unilateral no shops many times and – when on the receiving side – have usually been sensitive to why the other party wouldn’t sign a reciprocal no shop.  In most cases, I simply don’t put a lot of weight behind the no shop due to the ability to bind it with time (30 – 45 days), plus whenever I’m on the receiving end, I’ve done my best to test commitment before signing up to do the deal. 

In addition to Tom’s post, Rick Segal wrote up his thoughts in a post titled “The Handshake Clause” where he makes the point that his firm doesn’t sign a term sheet until they are committed to doing a deal.  His explanation of how he approaches this is useful, but it is important to acknowledge that there is a wide range of behavior among VCs – the group that doesn’t put a term sheet down until they are committed are at one end of the spectrum; the group that puts down a term sheet to try to lock up a deal while they think about whether or not they want to do it is at the other.  I’d like to think that we are at the “good” end of this spectrum (e.g. we won’t issue a term sheet unless we are ready to do a deal.)  Obviously, your mileage will vary with the VCs you are dealing with – hence the value of doing your own due diligence on your potential future partners.

As I mulled this over, I came up with a couple of examples in the past 10 years where the no shop had any meaningful impact on a deal in which I was involved.  I could come up with an edge case for each situation, but this was a small number vs. the number of deals I’ve been involved in.  In addition, when I thought about the situations where I was a VC and was negatively impacted by not having a no shop (e.g. a company we had agreed with on a term sheet went and did something else) or where I was on the receiving end of a no shop and was negatively impacted by it (e.g. an acquirer tied me up but then ultimately didn’t close on the deal), I actually didn’t feel particularly bad about either of the situations since there was both logic associated with the outcome and grace exhibited by the participants.  Following are two examples:

1. We signed a term sheet to invest in company X.  We didn’t include a no shop in the term sheet – I don’t think there was a particular reason why.  We were working to close the investment (I think we were 15 days into a 30–ish day process) and had legal docs going back and forth.  One of the founders called us and said that they had just received an offer to be acquired and they wanted to pursue it.  We told them no problem – we’d still be there to do the deal if it didn’t come together.  We were very open with them about the pros and cons of doing the deal from our perspective and – given the economics – encouraged them to pursue it (it was a great deal for them.)  They ended up closing the deal and – as a token – gave us a small amount of equity in the company for our efforts (totally unexpected and unnecessary, but appreciated.)
2. I was an existing investor in a company that was in the process of closing an outside led round at a significant step up in valuation. The company was under a no shop agreement with the new VC.  Within a week of closing, we received an acquisition overture from one of the strategic investors in the company.  We immediately told the new lead investor about it who graciously agreed to suspend the no shop and wait to see whether we wanted to move forward with the acquisition or the financing.  We negotiated with the acquirer for several weeks, checking regularly with the new potential investor to make sure they were still interested in closing the round if we chose not to pursue the acquisition.  They were incredibly supportive and patient.  The company covered their legal fees up to that point (unprompted – although it was probably in the term sheet that we’d cover them – I can’t recall.)  We ended up moving forward with the acquisition; the new investor was disappointed in the outcome but happy and supportive of what we did.

As I said earlier, these are edge cases – in almost all of my experiences the no shop ended up being irrelevant.  But – as both of these example show – the quality and the character of the people involved made all the difference.  Near the end of his post, Tom makes the point that it’s “good negotiating advice to make sure that every clause which can be mutual is mutual.”  I completely agree.

I just noticed that the price of crude oil topped $67 a barrel.  When the fuck did that happen?

In the early 1980’s, my first programming job (when I was in high school and a freshman/sophomore in college) was for a software company in Dallas called Petcom Systems.  I was the first non-founder programmer (it was started by a husband and wife team) and I wrote “Oil and Gas Economic Analysis Software” (called PCEconomics) and a Well Log Analysis Program (called PCLog).  I also worked on their Oil and Gas Accounting Product (PCAccounting) which was my first intimate exposure to the thrills of accounting software  I got paid $10 / hour plus 5% of revenue for the software I wrote, which turned out to be a suitably large number for an 18 year old in 1983 and 1984.  I watched Petcom grow from the four of us (husband, wife, me, secretary) to 20 people as they rode the early 1980’s oil boom.

In the spring and summer of 1985 the price of oil fell apart.  Petcom’s phones stopped ringing.  50% of their customers went out of business as their cost structures had expanded under the assumption that the price of oil would stay at its artificial high.  By the end of the year, Petcom was back down to about four people.  Two years later they had transitioned their products (essentially repurposing their accounting software) to be “point of sale for CD / video stores.” Ironically, Petcom’s primary competitor was another Dallas-based company – a small public company called David P. Cook & Associates that morphed into Blockbuster.

No one expected any of this (when I went to college, I was naive enough to believe people when they said “the real estate and oil economy of Dallas will keep it going forward forever”), and I had my first “boom and bust cycle” experience.

This is going to end badly.

My long time friend Andy Sack’s company Judy’s Book has just released “Judy’s Books Maps” (they claim to have had countless focus groups and thousands of hours of brainstorming to come up with the name for this new feature.)  It’s yet another great example of combining Google Maps with a “Web 2.0 service” (or whatever the hip phrase is this week).  Take a look at some of the reviews that I’ve done on Judy’s Book in Homer or in Boulder.  Andy and team are hard at work and ramping the features, functionality, and community around Judy’s Book quickly – join the party, do some reviews, and win some coffee or a free iPod Shuffle.

On my run today, I listened to a hilarious podcast from Chris Pirillo and and his wife Ponzi.  The first fifteen minutes topped Jon Stewart on the hysterical meter as Chris makes every “husband mistake” in the book around cleaning dishes, cooking, and laundry.  Chris – two words passed down to me from my grandfather: “Yes Dear.”  And – do NOT criticize her cooking.  Finally, when she starts talking about her hair, don’t forget to say “Darling, it’s amazing – you’ve had two perfect haircuts in a row.”  Chris and Ponzi are clearly having fun – the subtext of it all is that she’s got him completely handled.

Fred has another great post up this week in his VC Cliche of the Week column on the cliche “he’s got the weight of the company on his shoulders.”  If you are a CEO or a senior exec who feels the weight of the business on your shoulders, read it.

I have a long set of rants about how most PowerPoint presentations suck.  Every now and then, I see a great one, but most of the time I’m just tortured by them.  Today, I got an email from Ted Dolotta (one of the first Softbank-related people I ever met) that was priceless.  It linked to the The Gettysburg Powerpoint Presentation.  In addition to being a classically miserable presentation, Lincoln’s intro was perfect.

Announcer: And now please welcome President Abraham Lincoln.

President Lincoln: Good morning. Just a second while I get this connection to work. Do I press this button here? Function-F7? No, that’s not right. Hmmm. Maybe I’ll have to reboot. Hold on a minute. Um, my name is Abe Lincoln and I’m your president. While we’re waiting, I want to thank Judge David Wills, chairman of the committee supervising the dedication of the Gettysburg cemetery. It’s great to be here, Dave, and you and the committee are doing a great job. Gee, sometimes this new technology does have glitches, but we couldn’t live without it, could we? Oh – is it ready? OK, here we go:

Take a look at the Gettysburg address via PowerPoint (or via ppt in HTML).  Now, read the real thing.  Which is more effective?

I have my wife back.  Amy has been lost in a tome (1079 pages) called Infinite Jest (by David Foster Wallace) for the past 10 days (about nine days longer than it takes her to read a typical book.)  Our friend Matt Blumberg referred to it recently as “Infinite Book” – that says it all.  By Saturday evening, Amy was reduced to continuously muttering words I didn’t know the definitions of while repeating “David Foster Wallace is a genius” over and over again.  Tonight she wrote up an Infinite Post on the book – if you want to expand your vocabulary, are a reader, philosopher, wordsmith, linguist, grammarian, high school spelling bee champion, or just generally nuts, wander over to her post on the subject: “Infinite Jest: Victory.”  Of course, in the spirit of this book, she has several other posts up already about it including “Infinite Jest: Prolix” (what the hell is a “prolix”?) and “Infinite Jest: Biting Off a Big One.”  Damn – it’s still almost Tuesday.

As an entrepreneur, the way to get the best deal for a round of financing is to have multiple options.  If you’ve been a studious reader of our term sheet series, you are painfully aware that there are many other terms – beside price – that help define what “the best deal” actually is.  However, there comes a point in time where you have to choose your investor and shift from “search for an investor” mode to “close the deal” mode.  Part of this involves choosing your lead investor and negotiating the final term sheet with him.

A “no shop agreement” is almost always part of this final term sheet.  Think of it as serial monogamy – your new investor to be doesn’t want you running around behind his back just as you are about to get hitched.  A typical no shop agreement is as follows:

“No Shop Agreement:  The Company agrees to work in good faith expeditiously towards a closing.  The Company and the Founders agree that they will not, directly or indirectly, (i) take any action to solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from any person or entity other than the Investors relating to the sale or issuance, of any of the capital stock of the Company or the acquisition, sale, lease, license or other disposition of the Company or any material part of the stock or assets of the Company, or (ii) enter into any discussions, negotiations or execute any agreement related to any of the foregoing, and shall notify the Investors promptly of any inquiries by any third parties in regards to the foregoing.  Should both parties agree that definitive documents shall not be executed pursuant to this term sheet, then the Company shall have no further obligations under this section.”

At some level the no shop agreement – like serial monogamy – is more of an emotional commitment; it’s very hard to “enforce a no shop agreement” in a financing, but if you get caught cheating, your financing will probably go the same way as the analogous situation when the groom or the bride to be gets caught in a compromising situation.

At some level, the no shop agreement reinforces the handshake that says “ok – let’s get a deal done – no more fooling around looking for a better / different one.”  In all cases, the entrepreneur should bound the no shop by a time period – usually 45 to 60 days is plenty (and you can occasionally get a VC to agree to a 30 day no shop.)  This makes the commitment bi-directional – you agree not to shop the deal; the VC agrees to get things done within a reasonable time frame.

Bob Geldof is echoing through my head.  It was one of those days – it didn’t help that I overdid it yesterday on my run up and down Homer Hill (and am still feeling weird 24 hours later from 90 minutes of too much hill.)  At least I have a pretty pictures to look at.  Here are your Alaska photos of the day.

(Blackstone Glacier and some very happy looking sea otters that didn’t realize that Monday’s happen – courtesy of Dave Jilk.) 

The Homer, Alaska sunset is on the left; the Maine sunset (where Seth Levine – who works with me – is on vacation right now) is on the right.  How’s that for a bi-coastal blog – Seth decided to go on vacation about as far away from me as he could get and still be in the United States. 

It’s almost Tuesday.