The Letter of Intent (LOI) is the most critical stage of any M&A or fundraising process. While the price is "non-binding," signing an LOI, especially its binding "no-shop" clause, permanently shifts negotiation leverage to the buyer. Founders must scrutinize terms like working capital adjustments, founder vesting, and exclusivity periods to avoid costly mistakes.
Key takeaways
- Signing an LOI flips leverage to the buyer instantly.
- Negotiate the "no-shop" clause fiercely: 30-45 days max.
- Define the Working Capital Adjustment precisely to avoid price cuts.
- Model your founder lock-up as part of the price, not just a job.
- Hire a specialist M&A lawyer before you receive an LOI.
- The "price" isn't real until it's defined as cash, stock, earn-outs, and post-closing adjustments.
The Letter of Intent (LOI) arrives. Your heart pounds. A life-changing number for your company sits in your inbox. But that number, and the term “non-binding,” are a dangerous illusion.
An LOI isn't the finish line. It’s the starting gun for a 60-day sprint where you are the target. Before you sign, you have all the power. You can talk to other buyers, create a competitive process, and walk away at any time. The moment you sign the LOI’s binding “no-shop” clause, that leverage vanishes. The power flips entirely to the buyer.
Thinking an LOI is informal is a fatal mistake. It’s a blueprint for the final deal. While you might change the paint color, the foundation is set in stone. This document is where the deal is truly won or lost.
The economic terms are presented as "non-binding," subject to diligence. This is true—but only if the buyer finds a major problem. You cannot re-negotiate these terms upwards. Here's how to look past the headline number.
The "price" is not a single number. It’s a combination of cash, stock, and other contingent payments. You need to value each component.
Stock: Is the acquirer a public company, or another startup? If it's public, is the stock liquid? Or does it have a lock-up period? If it’s private, you’re now valuing their business on limited information. You must ask for their cap table and financials.
Earn-Out: This is where part of the purchase price is tied to future performance goals (e.g., "You get an extra $5M if the product hits $2M in ARR in the 18 months post-acquisition"). Treat earn-outs with extreme skepticism. Once you sell, you lose control over resources, budget, and strategy. The buyer is incentivized to ensure you don't hit the targets. Earn-outs are often a way to offer a higher price on paper that never materializes in reality.
This is the most common and painful post-LOI surprise. An LOI will state you must leave a "normal" amount of working capital in the business at closing. Working capital is typically defined as…
If…
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Frequently asked questions
- What's the difference between an LOI and a Term Sheet?
- They are functionally similar. "LOI" is more common in M&A deals, while "Term Sheet" is standard for venture capital financing rounds. Both outline the key terms of a proposed transaction.
- How much does an M&A lawyer cost to review an LOI?
- Expect to pay $5,000 to $15,000 for an experienced M&A lawyer to review an LOI and advise you on negotiations. This is an insurance policy against a multi-million dollar error.
- Can I really ignore the 'non-binding' parts of an LOI?
- No. While not legally enforceable in court, deviating from the "non-binding" terms like price requires a major negative finding in diligence. Attempting to renegotiate them without cause will likely kill the deal and damage your reputation.
- What's a standard exclusivity 'no-shop' period?
- 30-45 days is standard for a committed buyer. Anything over 60 days is a red flag, as it gives the buyer too much leverage to drag out diligence and re-trade the price.
- What if a buyer tries to re-trade the price after the LOI is signed?
- The buyer must provide a specific, major reason discovered during diligence that justifies the change (e.g., "We found a $2M tax liability you didn't disclose"). If they can't, it's a bad-faith negotiation, and you must be prepared to walk away, even with the no-shop.
