Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Negotiate Breakup Fees and No-Shop Clauses
Transcript
- Lucas: There's a moment in every acquisition process that founders dread — the one where the buyer's counsel sends over the merger agreement and you see a clause that lets the buyer walk away for almost any reason, but you can't even talk to another bidder. That's the intersection of two critical provisions: the no-shop clause and the breakup fee. Luna: And in the last few months, we've seen several high-profile tech deals collapse post-announcement. For founders who spent a year on an exit process, that can be devastating. Lucas: Exactly. So let's start with what these terms actually are. A no-shop clause prohibits the target company from soliciting or entertaining competing offers after signing the definitive agreement. It runs from signing to closing. The breakup fee — or termination fee — is the amount the buyer has to pay the seller if the deal fails under certain conditions, usually if the buyer walks away or if regulators block it. Luna: And there's also a reverse breakup fee, which is paid by the seller if they back out to take a better offer. That's where the negotiation gets personal for founders. Lucas: Right. If these conversations are useful for what you're building or running, we just want to mention that listener support is what keeps this show ad-free and independent. If you'd like to help, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that goes a long way, and we're grateful for every person who chips in. Luna: Yeah, totally. Now back to the deal mechanics — what do typical breakup fees look like in practice? Lucas: For a private company acquisition, a standard breakup fee is usually between three and five percent of the enterprise value. If you're selling for $100 million, you'd negotiate a $3 million to $5 million fee. But it varies by deal size and leverage. In a competitive auction where multiple bidders are circling, founders can push for a lower fee because the buyer is eager to lock up the deal. Luna: What about reverse breakup fees? That's where the founder's stock is on the line if they get cold feet. Lucas: Reverse breakup fees are more common for public company deals, but they're appearing more in private acquisitions as well. If the founder decides to accept a late-stage higher offer after signing, they pay a fee — usually one to three percent — to the original buyer. That's the price of shopping the deal. Luna: And the no-shop clause locks the founder in. So you're essentially buying a window of exclusivity for the buyer. Lucas: Exactly. But smart founders also negotiate a 'fiduciary out' — a provision that allows the board to consider an unsolicited superior proposal even during the no-shop period, as long as they notify the current buyer and give them a chance to match. That's standard in most merger agreements. Luna: So the key is balance: you want enough protection that the buyer doesn't walk over minor issues, but not so much that you can't take a truly better deal. Where do we see leverage shifting in today's market? Lucas: We're in a weird spot as of late July 2026. Tech valuations are mixed — some names like NVIDIA and Meta are up, but others like Rivian and Coinbase are down. That uncertainty makes buyers more skittish. They want the ability to walk if due diligence uncovers a problem. As a result, we're seeing more deals with lower breakup fees — closer to three percent — and broader no-shop clauses that don't require the buyer to match competing offers. Luna: That's tough for founders. You're essentially taking your company off the market for months with less downside protection for the buyer walking. Lucas: Right. The other thing to watch is the material adverse change clause. That's the buyer's escape hatch if something fundamentally changes in the business. In a volatile market, buyers try to define 'material adverse change' very broadly — including general economic downturns or industry-wide declines. Founders should push to exclude those macro factors so the MAC clause only applies to company-specific issues. Luna: Like if you lose your largest customer or your CTO quits, not if the NASDAQ drops five percent. Lucas: Exactly. And that connects back to breakup fees: if the buyer walks using a MAC clause, the fee is often not paid. So founders want a narrow MAC and a clear list of conditions under which the buyer must still pay the breakup fee even if they terminate. Luna: Take the recent Cyera acquisition of Oasis Security for $1 billion. I don't know the specific terms, but for a deal that size, you'd expect a breakup fee around $30 million to $50 million — three to five percent — and probably a no-shop clause with a fiduciary out. Lucas: That's a good example. Cyera is buying Oasis to consolidate AI agent security. For Oasis's founders, the no-shop clause locks them in for a closing period that could be three to six months. If another buyer comes in with a $1.5 billion offer, they'd have to pay the fee — but they could still take it if the fiduciary out is properly drafted. Luna: So the art is in the wording. What's the one thing a founder should absolutely insist on when reviewing these clauses? Lucas: A carve-out for 'superior proposals' that is clearly defined: higher price, higher certainty of closing, and no regulatory hurdles. Without that, you're stuck. Also, negotiate a matching right for the buyer — they get five days to match any superior offer before you can terminate. That's fair and standard. Luna: What about the duration of the no-shop? Should it ever be longer than the expected closing period? Lucas: Ideally, the no-shop should terminate when the deal closes or if the buyer terminates. But some buyers want the no-shop to survive for a period after termination — say, a tail of 30 days. That prevents the founder from immediately going to another buyer. Founders should resist any tail longer than 30 days, and even that is aggressive. Luna: And if the buyer drags their feet on closing? Say they take nine months for regulatory approval and then try to renegotiate price? Lucas: That's where a specific performance clause can help. It allows the founder to force the buyer to close if all conditions are met. But courts rarely grant that — they prefer money damages. So the breakup fee becomes the real remedy. That's why founders should push for a higher fee if the buyer is a large company with deep pockets — they're less likely to walk over small issues if it costs them $50 million. Luna: So essentially, the breakup fee is insurance. And the premium is paid by the buyer. Lucas: Right. The other nuance: in a reverse breakup fee scenario, the seller typically pays the fee from the proceeds of the new deal. So it's not cash out of pocket — it's just a haircut on the higher offer. Founders can often negotiate a lower reverse fee because of that. Luna: And all of this lives in the term sheet. At signing, you want a clear summary of the breakup fee, the no-shop duration, and the MAC clause exclusions. If those aren't spelled out, you're leaving yourself exposed. Lucas: One last thing: in a hot market like early 2021, you saw breakup fees as low as two percent because buyers were desperate. In today's cooler climate, we're back to three to five percent. But founders can still get creative — for example, tying the fee to the amount of expenses incurred, or a sliding scale based on how far along the process is. A deal that falls apart after regulatory approval costs more than one that dies in the first month. Luna: Right. So the key takeaway: the no-shop and breakup fee aren't boilerplate. They are leverage points that define your downside risk. Founders should treat them as core negotiation items, not legalese to skip over. Lucas: Exactly. As one veteran M&A lawyer told me, the breakup fee is the only number in the agreement that the buyer might actually want to pay someday — because it lets them walk. Make sure it hurts enough to keep them at the table.