Venture Deals: Chapter 12: Letters of Intent—The Other Term Sheet

There is another type of term sheet that is important in an entrepreneur’s life—the letter of intent (LOI). Hopefully, one day you’ll receive one from a potential acquirer that will lead to fame, riches, and happiness. Or at least you’ll get a new business card on heavier card stock.

Typically the first formal step by a company that wants to acquire yours is for it to issue a letter of intent. This sometimes delightful and usually nonbinding document (except for things like a no-shop agreement) is also known as an indication of interest (IOI), memorandum of understanding (MOU), and even occasionally a term sheet.

As with our friend the term sheet, there are some terms that matter a lot and others that don’t. Once again there are plenty of mysterious words that experienced deal makers always know how and where to sprinkle so that they can later say, “But X implies Y,” often resulting in much arguing between lawyers. We’ve had LOIs get done in a couple of hours and had others take several months to get signed. As with any negotiation, experience, knowledge, and understanding matter. The LOI negotiation is usually a first taste of the actual negotiating style you will experience from the other party.

To keep things straightforward, we are going to focus on explaining the typical case of a two-party transaction between a buyer and a seller, which we’ll refer to as an acquisition. As with many things in life, there are often more complex transactions, including three or more parties, but we’ll save that for a different book.