What are the most important components of a letter of intent (LOI)?
Takeaway: The Letter of Intent is the term sheet for your company's sale; while mostly non-binding, it locks in the critical economic terms like price and establishes an exclusive negotiation period, making it a pivotal and difficult-to-re-trade document.
After a period of discussion with a potential acquirer, if they are serious about buying your company, they will present you with a Letter of Intent (LOI), sometimes also called a Memorandum of Understanding (MOU) or a Term Sheet. The LOI is the M&A equivalent of a financing term sheet. It is a document that outlines the high-level, proposed terms of the acquisition.
Just like a financing term sheet, an LOI is mostly non-binding. It is a good-faith agreement on the core terms of the deal before both parties spend hundreds of thousands of dollars on legal fees to draft the definitive merger agreement. However, also like a financing term sheet, it contains several key provisions that are legally binding, and it creates immense moral and practical pressure to stick to the agreed-upon terms.
Key Components of an LOI
Purchase Price and Structure: This is the most important economic term. The LOI will specify the total price being offered for the company and how that price will be paid (e.g., all cash, all stock in the acquiring company, or a mix). It will also specify the legal structure of the transaction (e.g., a stock sale, asset sale, or merger).
Treatment of Options and Equity: The LOI will outline how the company's outstanding stock options and other equity awards will be handled in the transaction (e.g., if they will be "assumed" by the acquirer or "cashed out").
Escrow / Indemnification: To protect themselves from any breaches of your reps & warranties, the buyer will require a portion of the purchase price (typically 10-15%) to be held back in an escrow account for a period of time after closing (typically 12-18 months). The LOI will specify these key indemnification terms.
Key Employee Retention: The acquirer is often just as interested in your team as they are in your technology. The LOI will often state that the deal is contingent upon a certain group of key employees signing new employment agreements with the acquiring company.
The Binding Provisions
While the economic terms are non-binding, the LOI will contain two clauses that are legally enforceable from the moment you sign:
Exclusivity ("No-Shop"): This is the most critical binding term. The no-shop clause legally prohibits you from negotiating with any other potential buyers for a set period of time (often 30-60 days) while the acquirer conducts their final due diligence. This gives the buyer the assurance that you will not use their offer to shop for a better deal.
Confidentiality: The LOI will reaffirm that all discussions and the terms of the proposed deal are strictly confidential.
The LOI is a pivotal moment in the life of your company. It is the document that transforms a casual conversation into a formal sale process. While it is not the final contract, it creates powerful momentum, and the core economic terms agreed to in the LOI are very rarely changed in the final definitive agreements. It is essential to have experienced M&A counsel review the LOI with you before you sign.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.