Letter of Intent (LOI)
A Letter of Intent is a non-binding document expressing intent to enter an agreement, used in B2B sales and M&A transactions.
What Is a Letter of Intent (LOI)?
A Letter of Intent — commonly abbreviated as LOI — is a written document in which one party expresses a formal intention to enter into an agreement with another. It is typically non-binding: it signals serious intent and establishes a framework for the relationship, but it does not legally obligate either party to complete the transaction.
In the startup context, LOIs appear in two distinct situations:
- B2B sales: A prospective customer expresses intent to purchase or pilot a startup’s product or service, before a formal contract is executed
- M&A transactions: An acquirer expresses intent to purchase a company, outlining key deal terms before a definitive purchase agreement is drafted
Both uses are common, and understanding how to interpret and use an LOI in each context is an important skill for founders navigating sales, fundraising, or an exit process.
LOI in B2B Sales: Traction Evidence for Investors
In early-stage B2B startups, a signed customer LOI is one of the most valuable pieces of evidence a founder can bring to an investor conversation. Investors are acutely aware that founders will describe customer interest in optimistic terms. A signed LOI converts subjective enthusiasm into a formal, written commitment — even if it remains non-binding.
What a B2B LOI Typically Contains
| Element | Description |
|---|---|
| Parties | Legal names of both companies |
| Product or service | Clear description of what the customer intends to purchase |
| Expected purchase value | Dollar amount of the anticipated contract (e.g., “$120,000/year”) |
| Pilot or contract timeline | Intended start date and duration |
| Conditions | Any prerequisites (security review, procurement approval, etc.) |
| Exclusivity | Whether the customer agrees not to evaluate competitors during the period |
| Expiration | Date by which the LOI expires if not converted to a formal agreement |
Example B2B LOI scenario:
A startup selling HR analytics software has had five discovery calls with Acme Corp’s CHRO. The CHRO is enthusiastic and verbally commits to a pilot. The startup asks for a signed LOI before the pilot begins.
The LOI states: “Acme Corp intends to pilot [Product] for 90 days, with an anticipated annual contract value of $85,000 upon successful completion. This LOI expires on [Date] unless a formal agreement is executed.”
This single document transforms an anecdote into evidence — and investors weigh it significantly when evaluating traction at pre-revenue or early-revenue stages.
LOI as Fundraising Evidence
When founders tell investors “we have five customers interested,” the natural investor question is: at what level of commitment? The difference in perceived traction is substantial:
| Level of Customer Commitment | Investor Interpretation |
|---|---|
| Verbal interest in a meeting | Weak; table stakes |
| Follow-up email requesting a demo | Weak to moderate |
| Completed product demo + positive feedback | Moderate |
| Formal pilot agreement | Strong |
| Signed LOI with dollar value | Strong — signals real procurement intent |
| Signed contract / revenue | Strongest |
An LOI from a recognizable company — a Fortune 500, a known brand in the target vertical — carries disproportionate weight. Investors reason that large procurement teams do not sign LOIs lightly. The document had to pass legal review and management approval, which filters out performative interest.
Important caveat: experienced investors know that LOIs are non-binding. They will ask follow-up questions: Has the customer gone through their security review? Has the CHRO actually gotten budget approval? Is the LOI gated on legal sign-off that has not yet occurred? Founders should be transparent about the conditions remaining before an LOI converts to revenue.
LOI in M&A: The Acquisition Context
When a company is being acquired, the LOI (sometimes called a term sheet or letter of intent interchangeably in M&A contexts) is the document through which the acquirer states their intent to purchase and outlines the key economic terms.
What an M&A LOI Typically Contains
| Term | Description |
|---|---|
| Purchase price | The total acquisition consideration (cash, stock, or both) |
| Structure | Asset purchase vs. stock purchase |
| Earnout provisions | Additional payments contingent on post-close performance |
| Retention requirements | Key employees who must remain as a deal condition |
| Exclusivity period | Duration during which the seller cannot talk to other buyers (typically 30–60 days) |
| Conditions to close | Due diligence completion, regulatory approvals, board approval |
| Break-up provisions | What happens if either party walks away |
An M&A LOI is more detailed and has more binding provisions than a B2B LOI. The exclusivity clause — similar to the no-shop clause in a VC term sheet — is usually binding: once signed, the seller cannot solicit competing offers during the exclusivity window.
LOI vs. Term Sheet: Key Differences
These two terms are sometimes used interchangeably, which causes confusion. In the startup ecosystem, they have distinct primary usages:
| Dimension | LOI | Term Sheet |
|---|---|---|
| Primary context | M&A or B2B sales | VC investment |
| Typical length | 2–5 pages | 5–15 pages |
| Binding provisions | Exclusivity, confidentiality | No-shop clause, confidentiality |
| Detail level | Moderate | High |
| Issued by | Buyer or customer | Investor |
| Outcome document | Definitive purchase agreement or contract | Stock purchase agreement, IRA, voting agreement |
How to Get Customers to Sign an LOI
Getting a customer to sign an LOI is a sales exercise. The key principles:
- Make it easy: Provide a short, simple document. A two-page LOI with clean, plain language is more likely to be signed than a five-page document full of legal jargon.
- Frame it as a mutual commitment: “This helps us prioritize your onboarding and allocate engineering resources for your pilot.”
- Remove ambiguity: Make the LOI non-binding and state clearly that it does not obligate either party. The customer needs to feel safe signing.
- Get to the right signatory: The CHRO’s enthusiasm is not enough. The person signing needs authority — often that means involving procurement or legal.
- Set a clear expiration date: An expiration creates urgency and prevents the LOI from lingering in someone’s inbox.
LOI in M&A Diligence: What Comes Next
A signed M&A LOI triggers the due diligence phase. The acquirer will typically request:
- Financial statements (3 years, audited if available)
- Customer contracts and renewal rates
- Cap table and equity records
- IP assignments and ownership chain
- Employee agreements, including any non-competes
- Pending litigation or regulatory issues
- Technology architecture documentation
The exclusivity period in the LOI limits the seller to working exclusively with the interested acquirer during this phase. If due diligence reveals issues — understated liabilities, customer churn, IP complications — the acquirer may reprice or walk away. LOIs do not guarantee deals close.
Key Takeaway
A Letter of Intent is a non-binding expression of serious intent — whether from a customer about to sign a contract or an acquirer about to buy a company. In B2B sales, a signed LOI from a credible enterprise customer is one of the strongest early traction signals you can present to investors, because it converts verbal interest into a formal, written commitment. In M&A, the LOI establishes the deal terms and triggers due diligence, with the exclusivity clause being its only reliably binding provision. To maximize the value of LOIs as fundraising evidence, focus on named companies, stated dollar values, and honest disclosure of any conditions that remain before the LOI converts to actual revenue or a closed transaction.