The Letter of Intent (LOI) -
10 Things to Know About Selling Your Startup
The Letter of Intent (LOI) is a key component in the sale of any startup. For the entrepreneur who has put their heart and soul into a venture and who is now ready to cash out, understanding exactly what a Letter of Intent is and how it works is critical to maximizing the sale price and avoiding any misunderstandings between the buyer and seller.
What is a Letter of Intent (LOI)?
The Letter of Intent is a short, pre-acquisition agreement that resembles a contract between two parties, often a buyer and a seller. It is a step in between the initial negotiations and the purchase and sale agreement. A Letter of Intent may also be known as a term sheet.
What's in the Letter of Intent?
Each LOI is unique, but common terms in a Letter of Intent example include the assumption of stock options, whether it is an asset deal vs stock deal, conditions to close, representations and warranties, and the fee for breakup. The consideration for the sale is also detailed, making clear whether the sale will be for cash, stock, earnout, a promissory note, or some combination thereof.
Is a letter of intent binding?
While they are usually non-binding, some courts have ruled that when one party does not negotiate in good faith that their would-be business partner is entitled to “benefit of the bargain” contract damages.
Escrow and startups
Often, venture capital firms or private equity firms who want to invest in startups will require funds to be placed in escrow until additional conditions are met. The Letter of Intent may provide greater details if a startup's angel network or other buyer wants to take this route.
Exclusivity for the buyer
Buyers may want assurances that, given the stage of negotiations that have been reached, that they are the only candidate a start up is considering. The Letter of Intent will spell out for how long they can expect to be the exclusive candidate.
Contracts with customers may require consent before being transferred to new owners. A process for obtaining this consent should also be included in the Letter of Intent.
Considerations for employees
If a selling company's employees have stock options, how they will be handled by the purchaser should also be contained in the Letter of Intent. Does the new owner intend to assume them or terminate them? The Letter of Intent should also note whether these costs are included in the sale price, or are in addition to it.
Where do you get a Letter of Intent?
While a legal department may draw up their own Letter of Intent startups may also use a LOI template that is found online, or from their own files. Often one party will also request a recently executed Letter of Intent from the other party, knowing that it has already passed muster with their legal counsel, and adapt it for this particular transaction. You can also get in touch with Angel Kings - a professional venture capital and private equity firm dedicated to investing and growing startups and early-stage companies.
Getting to close
While the Letter of Intent is an important step on the pathway to selling a start up, it is not the final one. The Letter of Intent will often spell out exactly what it will take to get there, including timelines for any due diligence, nondisclosure terms, indemnification obligations, how and when it can be terminated, how disputes will be handled, and the conditions of the eventual purchase agreement.
Tips for a Strong Letter of Intent
As any good writer or lawyer can tell you, words are important, and this is certainly true in a Letter of Intent. A strong Letter of Intent should be simple and straight-forward, but have an enthusiastic and positive tone. The value proposition should be clear, detailed, and stated early on in the letter.
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