Deal Terms
Last updated
Quick Answer
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.
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.
Understanding Breakage Fee is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Breakage Fee falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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