An acquisition Letter of Intent (LOI) sets the key terms of your deal. While mostly non-binding, it creates powerful momentum that's hard to reverse. Focus on negotiating structure, founder roles, employee retention, and a short exclusivity period before you sign.
Key takeaways
- Treat the LOI as the real negotiation; terms rarely improve after signing.
- Scrutinize deal structure (cash vs. stock, asset vs. stock sale) as much as price.
- Aggressively negotiate for a short exclusivity ('no-shop') period, ideally 30 days.
- Define your future role, compensation, and reporting structure in detail.
- Secure a dedicated retention pool to keep your key employees aligned and motivated.
- Hire an experienced M&A lawyer before you even get the first draft.
Your Acquisition Isn't Real Until the LOI (But Not How You Think)
The endless coffee chats and "what if" calls are over. A 3-10 page document has landed in your inbox: the Letter of Intent (LOI). This is the moment an acquisition starts to feel real. But the rush of validation you feel is also your biggest vulnerability.
Most founders get this wrong. They see "non-binding" and fixate on the headline price, treating the rest as a formality. This is a catastrophic error.
The LOI is the negotiation. While the paper is mostly non-binding, it creates powerful moral and psychological momentum. The terms you agree to now set the ceiling for what you can get and the floor for what your acquirer expects. Every single thing will be harder to negotiate in your favor after you sign. The acquirer's lawyers wrote this document to protect the acquirer. Your job is to use your moment of maximum leverage—right now—to protect yourself, your team, and your investors.
An LOI is not a price tag. It's a blueprint for the entire deal. Focus your energy on these sections. 1. The Purchase Price and Structure
The headline number is the first thing you'll see. It's also the least reliable indicator of the deal's actual value. The structure is where value is created or destroyed.
Cash vs. Stock: Cash is king. It's certain and immediately understandable. Stock, especially in a public company, is variable. You need to ask: What is the lock-up period preventing me from selling? Is there a collar or other mechanism to protect against stock price volatility between signing and closing? If the acquirer is private, how do you value their stock and what are the prospects for liquidity? A good rule of thumb is to discount the stock portion of the offer by at least 15-25% to account for volatility and lock-up risk.
Be Wary of Earnouts: An earnout makes a chunk of the price contingent on hitting future goals post-acquisition (e.g., "$25M upfront plus $10M if the product hits $5M in revenue in 18 months").…
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Frequently asked questions
- Is an acquisition LOI legally binding?
- Only specific clauses, like exclusivity and confidentiality, are legally binding. The main commercial terms (price, structure) are not, but they create powerful psychological momentum and are extremely difficult to change later.
- How much does an M&A lawyer cost?
- Expect to pay $1,000-$2,000+ per hour or a percentage of the deal (1-2%). It is the most critical investment you will make in the acquisition process; do not try to save money here.
- What happens if I violate the 'no-shop' (exclusivity) clause?
- The acquirer can sue you for damages, including their legal and due diligence costs. It will likely kill the deal, harm your reputation, and prevent other potential buyers from engaging with you.
- Can I tell my team we have an LOI?
- No. You are bound by a strict confidentiality clause. Sharing news of the LOI, even internally, can jeopardize the deal and lead to legal consequences. Wait until you have your lawyer's explicit guidance on a communication plan.
