The LOI Blueprint: What's Binding, What's Negotiable, and When to Sign
For many founders, the first time they receive or send a Letter of Intent (LOI), it feels like crossing the finish line. It's the moment a prospective buyer, investor, or strategic partner puts numbers to paper and commits to a deal. The fanfare is understandable—it’s tangible proof that the late nights and hard-fought battles were worth it.
But here is the critical truth every founder must internalize: The LOI is the starting line, not the finish.
This document, which can seem simple and brief, is the most powerful weapon in the negotiation process. It’s a roadmap for the entire transaction. Get the roadmap right, and the journey to closing should be smooth. Get it wrong, and you can waste months, sink cash into diligence and legal fees, and possibly lock yourself out of better opportunities.
The power and danger of the LOI lie in its dual nature: it is intentionally partially binding and partially non-binding. It offers a glimpse of the commercial terms you desire (the price and structure) while legally enforcing the rules of engagement (exclusivity and confidentiality). Understanding this split is the difference between a savvy founder and one who signs away their leverage too early.
What is an LOI and When is it Necessary?
At its core, a Letter of Intent is a formal, non-obligatory document that outlines the framework and primary terms under which one party proposes to move forward with another.
Its core purpose is to signal serious, good-faith commitment. Think of it as an agreement to agree. It prevents both parties from spending massive resources—legal fees, accounting costs, and internal team time—on due diligence until they have high-level alignment on the terms that truly matter. Bypassing an LOI risks wasting resources only to discover the other party's valuation or payment terms were fundamentally unacceptable.
Founders will most commonly encounter LOIs in three critical scenarios:
Acquisitions (The Sale or Purchase of a Startup): This is the classic use case, where the Buyer sets out the terms to acquire the Target company.
Major Equity Investments: In large strategic funding rounds, especially from corporate venture capital, an LOI (or a term sheet) is used to nail down valuation, board seats, and investment rights before closing.
Major Joint Ventures/Partnerships: When forming a new entity or committing significant resources for a long period, an LOI formalizes the division of responsibilities and required capital.
The Binding Core: Terms You Must Treat as Final These are the terms that are legally enforceable from the moment you sign the LOI, even if the final commercial deal never closes. These clauses protect the investment in the process and must be reviewed by legal counsel immediately.
1. Exclusivity (The No-Shop Clause)
What it is: This clause is the Buyer's leverage. The Target company (Seller) agrees not to solicit, negotiate, or even talk to any other potential buyers for a defined period (usually 60 to 90 days).
Why it’s binding: The Buyer needs protection for the time and money they will spend conducting due diligence.
Founder Action:
If Selling: Negotiate the exclusivity period down to the bare minimum required (e.g., 45 days). The longer the period, the more leverage you lose.
If Buying: Ensure the exclusivity clause is broad, covering both active solicitation and passive inquiries from competitors.
2. Confidentiality (NDA)
What it is: A legal promise that both parties will keep the negotiations and the confidential information shared during due diligence a secret.
Why it’s binding: This protects sensitive business data (customer lists, proprietary code, financial forecasts) regardless of whether the final deal is executed.
3. Termination/Breakup Fees
What it is: Specifies penalties (a financial payment) if one party backs out for reasons outside the defined escape clauses (like a failed due diligence review).
Why it’s binding: This is a contractual fee.
If Selling (Target): Push back heavily on large fees. If a fee exists, try to make it mutual or include a Reverse Breakup Fee—a fee the Buyer pays if they walk away for a non-diligence-related reason.
If Buying (Acquirer): This clause is essential to protect your due diligence costs if the seller walks away to take a higher bid.
4. Expenses and Governing Law
What it is: Defines which state/country's laws govern the LOI and who pays for transaction costs.
Why it’s binding: Clarity on legal jurisdiction is essential. The standard clause states that each side pays its own transaction costs ("each party pays its own way").
The Non-Binding Roadmap: Key Negotiable Terms These terms define the commercial substance of the deal. They are a declaration of intent, serving as a framework for the final, definitive agreement. They are entirely negotiable, both in the LOI and during the drafting of the final contract.
1. Purchase Price / Valuation
What it is: The agreed-upon enterprise value or equity stake the Buyer is proposing.
Why it’s Non-Binding: The price is based on the Seller’s representations (e.g., "we have $1M in ARR"). If due diligence reveals these are false, the price will—and should—change. It is conditional on verification.
2. Consideration Structure (How You Get Paid)
What it is: How the purchase price will be delivered. This is more important than the number itself. Will it be cash at closing, the Buyer's stock, a deferred payment (earn-out), or a complex mixture?
Key Consideration: The Seller needs clarity on earn-out milestones; the Buyer needs assurance that the management team will stay incentivized.
3. Treatment of Debt and Working Capital
What it is: High-level assumptions about how company debt, cash on hand, and current assets/liabilities will be treated. Typically, the Seller must deliver the company "cash-free and debt-free," but the LOI sets this expectation.
4. Due Diligence Scope and Timeline
What it is: Defines the period and the areas the Buyer will investigate (financials, legal, technical, customer contracts).
The Buyer's Escape Clause: This is the non-binding term that gives the Buyer the ultimate power to walk away. If the results of due diligence are not satisfactory in the Buyer's sole discretion, the deal is off.
If Buying: Ensure the scope is broad and the language gives you complete discretion.
If Selling: Prepare to defend every representation you've made in your pitch deck with hard data.
5. Key Employee Treatment (The Talent Retention Plan)
What it is: Outlines the intended retention packages, new roles, compensation, and vesting schedules for the founder(s) and key team members post-acquisition.
Founder Action:
If Selling: Fight to get as much detail as possible on your future employment, title, and structure.
If Buying: Use this section to signal to the target team that you value them and have a clear vision for their integration and future compensation.
Optional but Strategically Essential Terms
Savvy founders use these terms, even if non-binding, to preemptively solve common negotiation roadblocks.
Escrow and Indemnification: This term indicates that a portion of the purchase price will be held in escrow (usually 10–15%) for 12–18 months. This money covers potential future problems (like undisclosed liabilities or breaches of warranties).
If Buying: Include a clear escrow provision to protect your investment.
If Selling: Fight to include a low, reasonable escrow percentage in the LOI to anchor a favorable expectation.
Representations and Warranties: A high-level list of facts the Seller asserts are true about the company ("All financials are accurate," "No pending litigation"). Including this early signals a commitment to a smooth path and a clean company.
Contingencies (e.g., Financing): The Buyer may state that the deal is conditional on securing financing by a certain date. The Seller should ensure this contingency is brief and includes a clear deadline to prevent the process from dragging on indefinitely.
Founder Action Steps: Master the Negotiation The moment you engage with an LOI, your approach must change. Treat this document with the reverence it deserves.
If You Are the Seller (Target Company):
Treat the LOI as 90% Binding: While the price can change, the legal and strategic process is binding. Do not sign if you are uncomfortable with the exclusivity period.
Guard Your Leverage: Use the Expiration Date as leverage. If the Buyer drags their feet, the LOI expires, and you are free to re-engage other bidders without breaching the agreement.
If You Are the Buyer (Acquirer):
Structure Your Escape Routes: Ensure your due diligence clause is watertight and gives you the sole right to terminate the deal if any finding is unsatisfactory.
Be Prepared to Pay for Protection: Know that the Seller will demand a short exclusivity period. Be ready to offer a small, refundable deposit or pay a higher expense reimbursement if you want more time.
Call Your Lawyer Right Away (Both Sides): The LOI will dictate the final legal agreement. Get experienced legal counsel involved to review the binding clauses and ensure the non-binding roadmap sets you up for success.
The LOI is the most critical document you will ever sign before the closing papers. By understanding the distinction between the binding guardrails and the non-binding roadmap, you can use it to control the negotiation and dramatically increase the odds of a successful, favorable exit or acquisition.
29th September 2025