Letter of Intent
A letter of intent (LOI) documents the key commercial terms of a proposed transaction before the parties commit resources to preparing full legal agreements.
What is a Letter of Intent?
A letter of intent is a preliminary document that records the key commercial terms agreed between parties before formal agreements are prepared. In startup and M&A contexts, letters of intent typically precede term sheets (for investment) or heads of agreement (for acquisitions and partnerships). They are used to establish a shared understanding of the deal structure before either party commits significant time and legal costs.
Most letters of intent are intentionally non-binding on the substantive commercial terms, while making certain provisions — such as exclusivity, confidentiality, and cost allocation — binding. This structure allows parties to progress negotiations with commercial confidence while preserving flexibility before final agreement.
When do you need a Letter of Intent?
- ✓Before commencing formal due diligence on an investment or acquisition
- ✓When agreeing the key terms of a significant commercial partnership
- ✓Before engaging lawyers to prepare full transaction documents
- ✓When establishing an exclusivity period for a proposed deal
- ✓As a preliminary record of agreed terms before a term sheet is issued
Key provisions to include
Transaction Overview
Summary of the proposed transaction structure — investment, acquisition, partnership.
Key Commercial Terms
Principal economics including price, valuation, equity stake, or revenue split.
Exclusivity
Binding commitment that the seller or target will not engage with other potential parties for a defined period.
Confidentiality
Binding obligation to keep the negotiations and information exchanged confidential.
Binding vs Non-Binding
Clear statement of which provisions are legally binding and which are subject to formal agreement.
Expiry
Deadline by which the parties must execute formal agreements or the LOI lapses.
Common mistakes to avoid
Not clearly specifying which provisions are binding — ambiguity can make the entire document inadvertently binding or non-binding
Agreeing to overly long exclusivity periods without adequate deal milestones
Including overly specific commercial terms in an LOI that are then difficult to walk back in negotiations
Frequently asked questions
Is a letter of intent legally binding?
It depends on the drafting. Most commercial LOIs are intentionally non-binding on the core commercial terms, while specific provisions (confidentiality, exclusivity, cost allocation) are expressed as binding. The document should clearly state which provisions are and are not binding.
What is the difference between a letter of intent and a term sheet?
The terms are often used interchangeably, particularly in investment contexts. Technically, a term sheet tends to be more detailed and closer to the formal agreement, while a letter of intent is more preliminary. Both serve to record agreed commercial terms before formal legal documents are prepared.
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