Deal Terms
Breakage Fee
A penalty paid when a party withdraws from a transaction after signing a binding agreement but before closing.
A breakage fee (also called a termination fee or break-up fee) is a financial penalty that one party must pay to the other if it fails to complete a transaction after signing a definitive agreement. In venture capital and M&A, breakage fees compensate the non-breaching party for time, opportunity cost, and expenses incurred in pursuing the deal.
In Practice
The acquisition agreement included a $5M breakage fee payable by the acquirer if they failed to close, representing approximately 3% of the $150M deal value — providing the startup meaningful protection against the acquirer walking away.
Why It Matters
Breakage fees provide deal certainty and compensate parties for the cost of exclusivity. For startups, a meaningful breakage fee from an acquirer signals genuine commitment and provides protection against deal collapse.
VC Beast Take
The size of breakage fees is a negotiation point. Too small and it provides no real protection; too large and it can deter legitimate renegotiation if material adverse changes occur. The sweet spot is typically 2-4% of deal value.
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