What are the most important components of a letter of intent (LOI)?

Takeaway: The most important components of a Letter of Intent (LOI) are the parties involved, structure, purchase price, escrow, employment agreements, confidentiality and exclusivity, due diligence, closing conditions, termination, and indemnification, setting the tone for negotiations and the definitive agreement.

A Letter of Intent (LOI), also known as a term sheet, is a critical document in the process of a startup acquisition. It outlines the basic terms and conditions under which an acquisition will occur and sets the foundation for the definitive agreement. Here are the most important components of an LOI.

Parties Involved

The LOI should clearly identify the buyer and the seller, along with any subsidiaries or affiliates involved in the transaction.

Structure of Transaction

This section outlines the nature of the transaction, whether it’s an asset purchase, stock purchase, or a merger.

Purchase Price

This includes the amount the buyer is willing to pay, how the payment will be structured, and whether it is subject to adjustment.

Escrow and Holdbacks

Sometimes a portion of the purchase price is held in escrow or held back to cover potential liabilities, such as unresolved lawsuits or indemnification claims.

Employment Agreements

If the buyer intends to keep current employees or the founders, the LOI should outline the basic terms of these agreements.

Confidentiality and Exclusivity

The LOI often contains provisions requiring the parties to keep the negotiations confidential. It may also include an exclusivity or "no-shop" clause where the seller agrees not to solicit or engage in negotiations with other potential buyers for a specified period.

Due Diligence

This section outlines the buyer's rights to examine the company’s books, records, and assets.

Closing Conditions

These are the conditions that must be satisfied for the deal to close, such as obtaining financing or regulatory approvals.

Termination

This provision specifies the circumstances under which either party can terminate the LOI.

Indemnification

The LOI might outline the basic terms of indemnification, which is how the parties will allocate risk for future liabilities. A lot of negotiation is involved in determining indemnification because it determines who pays and how much they pay in the event of a breach.

Conclusion

An LOI is usually non-binding, except for certain provisions like confidentiality and exclusivity. However, it sets the tone for the negotiations and the definitive agreement, so it's crucial to get it right. It is highly recommended to consult with an experienced attorney while drafting or reviewing an LOI to ensure all interests are well-protected.