A letter of intent (LOI) is a preliminary agreement between parties that outlines the key terms and conditions of a proposed investment or acquisition, typically non-binding except for specific provisions like confidentiality and exclusivity. In angel investing and venture capital, an LOI serves as a roadmap for negotiations, signaling serious intent from investors while allowing both sides to clarify major deal points before incurring significant legal costs associated with definitive agreements.
Why It Matters
For angel investors, an LOI establishes the framework for a potential deal without creating legal obligations to complete the transaction. This flexibility proves crucial because due diligence often uncovers issues that warrant renegotiation or deal termination. The LOI typically includes valuation ranges, investment amounts, ownership percentages, board composition, and timeline expectations, giving both investors and founders a shared understanding before committing to expensive legal documentation. Most LOIs include binding provisions around confidentiality (protecting sensitive company information) and exclusivity (preventing the company from soliciting other investors for 30-90 days), which protect the investor's time investment in due diligence.
Example
An angel investor group decides to invest $500,000 in a SaaS startup at a $4 million pre-money valuation. Before drafting a full stock purchase agreement, they present an LOI outlining their proposed investment amount, a 60-day exclusivity period, board observer rights, and pro-rata participation in future rounds. The LOI also specifies that the deal is contingent on satisfactory due diligence, including financial audits and customer contract reviews. During the 45-day due diligence period, investors discover that three major customers representing 40% of revenue are on month-to-month contracts rather than annual agreements as initially presented. This finding prompts renegotiation of the valuation to $3.2 million pre-money. Because the LOI was non-binding regarding commercial terms, both parties can adjust these figures without breach of contract, though the confidentiality provisions remain enforceable throughout.