Startups often move fast - but when you're courting investors, buyers, or major customers, you need to slow down just long enough to sign a Letter of Intent (LOI). It’s not a binding contract (usually), but it lays the groundwork for one - and sets the tone for the entire deal.
Here’s what founders should understand about LOIs before signing one.
What Is a Letter of Intent?
An LOI is a preliminary document that outlines the key terms of a proposed deal—before the parties spend time and money drafting a full agreement. Common in mergers, acquisitions, and funding rounds, an LOI typically covers:
- What each party wants to accomplish
- The basic structure of the deal
- Timelines and next steps
- Confidentiality and exclusivity terms
Binding vs. Non-Binding: Be Crystal Clear
Most of an LOI is non-binding, meaning either party can walk away. But certain provisions are binding, including:
- Confidentiality: You agree not to disclose deal terms or shared information
- Exclusivity (aka “no-shop”): You promise not to negotiate with others for a set time
- Good faith efforts: You agree to negotiate the full deal in good faith
Make sure your LOI says which sections are binding - and which are not.
Key Terms to Include
- Structure of the deal (e.g., stock purchase vs. asset purchase)
- Valuation or price range
- Timelines for diligence and closing
- Contingencies (e.g., subject to board approval or financing)
- Due diligence process
- Termination clause
Why LOIs Matter
Even though LOIs aren’t usually enforceable, they carry real weight. Investors and acquirers rely on them to gauge interest and commitment. And once signed, they’re tough to walk back from without burning bridges.
Common Mistakes
- Signing without legal review
- Including too much detail (which can box you in)
- Failing to define what’s binding
- Overcommitting in exclusivity clauses
Final Thoughts
Think of the LOI as a handshake - but with a paper trail. Get it right, and you set the stage for a smooth negotiation. Get it wrong, and you may spend months in a dead-end deal. We help founders negotiate LOIs that protect flexibility while keeping momentum strong.
Frequently Asked Questions
FAQs
Is a Letter of Intent legally binding?
Most of an LOI is non-binding, but certain provisions like confidentiality and exclusivity are enforceable.
Why do investors and buyers use LOIs?
LOIs outline deal terms upfront, giving both sides confidence before investing in due diligence and full contract drafting.
Can you walk away from an LOI?
Yes, unless you are bound by specific provisions. However, backing out without good reason may damage future relationships.
What’s the biggest risk in signing an LOI?
Overcommitting - such as granting long exclusivity or including too much detail—can lock you into unfavorable terms before negotiations are complete.
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