Letters of Intent: What to Know

Previously, I discussed agreements such as partnerships agreements and creating your own templates, which are all relevant for companies that already have a commercial product on the market. In this post and the next one, I discuss agreements to have on hand pre-launch, when you’re still developing your product, taking initial user feedback, and incorporating it into a future product release. Today’s post will focus on Letters of Intent. 

The Various Uses of LOIs

LOIs can be used pre-launch as well as for other strategic relationships when a company already has a product on the market, such as for partnerships or documenting major commercial transactions, including an acquisition. In today’s context, I discuss LOIs solely for early stage companies still developing their first product. 

Purpose of an LOI 

When you don’t have anything to sell quite yet but want to document future customer interest in the commercial release, an LOI can be a great way to show there’s a market for your product and companies that are willing to pay. This can help convince angel investors that your company will be a viable investment and that future revenue is possible. In this scenario, these LOIs are not usually binding – they only serve to show the customer is interested in the future product but does not commit them to buying it at all, in any quantity. Because of that, some investors may not be convinced of market potential by a few LOIs, especially if they’re from other small companies that may not actually have the funds to purchase. Sometimes, signing an LOI with slightly more mature companies will be enough to show commitment, although signing an actual customer agreement with payment terms is always the best way to show commitment and market demand.

Terms to Include in an LOI

If you’re looking to sign LOIs with future customers, here are some of the suggested terms to include: 

• Background. Provide some context as to what you’re developing and what your customer is interested in purchasing.
• References to existing agreements and confidentiality. If you’ve signed an NDA with this customer already, be sure to call that out.
• Express a mutual interest in signing a future, full agreement documenting the relationship. 
• State the LOI is non-binding. These LOIs are typically non-binding and it should be explicitly stated. 

For pre-launch contracts, these LOIs are often only a couple pages long and get right to the point. More complex transactions, such as M&A deals and major partnerships, will have more details fleshed out to allocate responsibility and liability, so that the companies get on the same page right off the bat. In both these cases, it’s best to discuss your needs with an experienced commercial attorney to make sure your LOI template contains appropriate provisions for your needs.