A Memorandum of Understanding (MOU) is a formal document that outlines the preliminary agreement between two or more parties regarding a proposed transaction or partnership, typically serving as a framework for future negotiations rather than a legally binding contract. In the context of angel investing, MOUs establish the basic terms of an investment deal before parties commit resources to extensive due diligence or legal documentation.
Why It Matters
For angel investors, an MOU serves as a critical checkpoint that allows both parties to confirm mutual interest and alignment before incurring significant legal costs or time investment. The document typically covers key terms such as valuation, investment amount, ownership percentage, and timeline for closing, giving investors the opportunity to walk away if fundamental disagreements emerge during subsequent negotiations. While usually non-binding, certain provisions within an MOU—such as exclusivity periods, confidentiality clauses, or non-solicitation agreements—can carry legal weight, protecting the investor's interests during the deal process.
Example
An angel investor meets with a fintech startup seeking $500,000 in seed funding. After initial discussions, they draft an MOU stating the investor will provide $500,000 for a 15% equity stake at a $3 million pre-money valuation. The MOU includes a 45-day exclusivity period during which the startup agrees not to negotiate with other investors, and both parties commit to completing due diligence within 60 days. The document also outlines that the investor expects one board seat and standard protective provisions. This MOU gives the startup confidence to share sensitive financial information while the investor conducts due diligence, knowing competitors won't swoop in during this period. If either party discovers deal-breaking issues—perhaps the investor finds undisclosed liabilities or the founders object to governance terms—they can part ways without legal consequences, having invested only modest time and resources.