A Letter of Intent, commonly referred to as an LOI, acts as a bridge between a casual conversation and a finalized legal contract. It is a document outlining the understanding between two or more parties which they intend to formalize in a legally binding agreement later. In the startup world, you will likely encounter this document when you are looking to buy another company, sell your own company, or enter into a massive strategic partnership.
Think of the LOI as a handshake that has been written down. It is not the final deal. It is the framework that tells the lawyers what to put in the final deal. It prevents parties from spending thousands of dollars on legal fees for a transaction that might not happen.
The Anatomy of the Document
#When you receive or draft an LOI, you are trying to establish the major business points before getting lost in the weeds of legal jargon. The document usually covers price, payment structure, and timeline. It sets the stage for due diligence.
Most LOIs include a few specific components:
- The Transaction Structure: What is actually being bought or sold? Is it assets or equity?
- Consideration: What is the price and how will it be paid?
- Conditions to Closing: What must happen before money changes hands?
- Due Diligence Timeline: How long does the buyer have to inspect the business?
By agreeing to these terms upfront, you reduce the risk of the deal falling apart later due to a misunderstanding on the basic economics.
Binding vs. Non-Binding Terms
#This is the area where most first-time founders get confused. An LOI is generally considered non-binding regarding the actual transaction. Neither party is usually forced to buy or sell just because they signed the LOI. You can walk away if the due diligence uncovers something terrible.
However, specific sections of the LOI are almost always legally binding. You need to read carefully to separate these out.
Confidentiality is usually binding. You cannot take the information you learn during this process and share it.
Exclusivity or a “No-Shop” clause is also binding. This prevents the seller from trying to find a better offer from a different buyer while the current buyer is spending money on audits and legal prep. It protects the time and resources of the party making the offer.
Comparing an LOI to a Term Sheet
#Founders often hear the phrases LOI and Term Sheet used in similar contexts. While they share DNA, they are often used in different scenarios. A Term Sheet is most frequently associated with equity investment rounds, such as raising venture capital. It outlines the terms of an investment.
An LOI is more frequently used in Mergers and Acquisitions (M&A) or complex commercial partnerships. If you are selling your startup to a big tech company, you get an LOI. If you are raising a Series A round, you get a Term Sheet. Both serve the same function of outlining terms before the final contract, but the context dictates the nomenclature.
When to Use an LOI
#You should move to an LOI when you are done exploring and are ready to verify. The casual coffee meetings are over. You have discussed the numbers broadly. Now you want to see the books.
Using an LOI signals seriousness. It shifts the dynamic from theoretical discussions to concrete steps. It allows a founder to ask difficult questions about the other party’s operations or finances because there is now a framework for that exchange.
It is also a tool for pacing. It creates a window of time where you can focus solely on one deal without the distraction of other potential suitors or partners. This focus is critical for small teams that cannot manage multiple complex negotiations simultaneously.