A buyer sends you a letter of intent. The headline purchase price is exciting. The term sheet is short. The buyer says it is mostly non-binding and that you will work out the details in the definitive agreement. You sign it quickly to demonstrate commitment and keep the deal moving.

This is the most common mistake founders make in an acquisition process.

The LOI — also called a term sheet or memorandum of understanding, depending on the buyer's preferences — is not a formality. It contains provisions that are genuinely binding, sets negotiating baselines that are extremely difficult to move once agreed, and hands the buyer significant leverage the moment you sign it. Understanding what you are agreeing to before you sign is not just prudent — in many cases, it is the difference between a good deal and a disappointing one.

What Is Actually Binding in a Typical LOI

Despite the "non-binding" label that most LOIs carry, several provisions in a standard letter of intent are fully binding as a matter of contract law:

  • Exclusivity (no-shop). The most consequential binding provision in most LOIs. The seller agrees not to solicit, discuss, or negotiate with any other potential buyer for a specified period — typically 45 to 90 days, sometimes longer. During that window, the buyer conducts due diligence with no competitive pressure. You cannot go back to other interested parties even if the buyer's diligence drags on or the deal starts to deteriorate.
  • Confidentiality. If the parties have not already signed a standalone NDA, the LOI typically includes binding confidentiality obligations. These survive a deal falling apart.
  • Break-up fees. Less common in startup M&A than in public company transactions, but occasionally present. If included, these are binding.
  • Governing law and dispute resolution. The law and forum for resolving disputes about the LOI itself are typically binding.

Everything else — purchase price, representations and warranties, indemnification terms, post-closing employment arrangements — is generally labeled non-binding. But "non-binding" is not the same as "unimportant."

Why Non-Binding Terms Still Matter

Once you have signed an LOI, the non-binding terms become the baseline for the entire negotiation that follows. Buyers draft the definitive agreement. Their lawyers start from the LOI and build out the details in the buyer's favor. Moving away from a term that appeared in the LOI — even a non-binding one — requires you to argue that the agreed-upon baseline was wrong, which puts you in the position of renegotiating after you have already conceded exclusivity.

The practical consequence: terms you left vague or accepted uncritically in the LOI tend to appear again in the definitive agreement in a form that favors the buyer, and pushing back is harder than it would have been at the LOI stage.

Exclusivity: Your Most Valuable Concession

The exclusivity period is the buyer's most important LOI provision. Once you are in exclusivity, the buyer knows you cannot run a competitive process. They can take their time with diligence, make reasonable diligence requests that become increasingly burdensome, and — in some cases — use the exclusivity window to renegotiate price after uncovering issues (real or framed as significant) during due diligence.

Sellers should approach exclusivity as a valuable concession that needs to be traded for something in return. Practical points:

  • Push for the shortest exclusivity period you can negotiate — 30 to 45 days is reasonable; 90 days is a long time to be locked out of the market.
  • Build milestone requirements into the exclusivity provision. For example: buyer must deliver a draft purchase agreement within 21 days of LOI signing; buyer must complete due diligence within 35 days; if either milestone is missed, exclusivity terminates automatically.
  • Consider whether exclusivity should be conditional — for example, conditioned on the buyer making a good-faith diligence deposit.

Deal Structure: Stock vs. Asset Sale

One of the most economically significant decisions in any acquisition — and one that is often decided at the LOI stage — is whether the transaction is structured as a stock purchase or an asset purchase.

Buyers generally prefer asset purchases. In an asset deal, the buyer picks and chooses which assets and liabilities to acquire, does not inherit unknown or contingent liabilities, and often gets a step-up in the tax basis of the acquired assets — which benefits them through depreciation deductions.

Sellers generally prefer stock sales. In a stock deal, all shareholders receive proceeds directly, the seller exits cleanly, and the gain is treated as capital gain (rather than potentially ordinary income on assets like inventory and receivables in an asset sale). For founders and employees holding incentive stock options, a stock sale can produce significantly better tax outcomes.

The problem: if the LOI says "asset purchase," you will have an extremely difficult time converting it to a stock deal in the definitive agreement. The buyer's legal team will object strenuously, and the structural preference will be treated as settled. Push for structure clarity at the LOI stage — or at minimum, do not accept an LOI that locks in asset purchase treatment without understanding what it means for your tax bill.

Earnouts: The Terms Matter Enormously

Earnouts are contingent consideration — a portion of the purchase price that is paid only if the business hits specified performance targets after closing. They are commonly used when buyer and seller disagree on value, or when a meaningful portion of future value depends on performance that hasn't yet been demonstrated.

If the LOI includes an earnout, several terms are critical and should be addressed before you sign:

  • Metrics. Revenue? EBITDA? Customer count? Product milestones? The choice of metric dramatically affects earnout achievability and is often the subject of post-closing disputes.
  • Measurement period. One year? Three years? Longer periods carry more uncertainty and more opportunity for the acquirer to take actions that affect the metric.
  • Acquirer obligations. Does the acquirer have an obligation to operate the business in a manner consistent with maximizing earnout achievement? Without an explicit covenant, the acquirer may make decisions post-close — new product priorities, budget cuts, sales team changes — that reduce your earnout payments while being entirely defensible as legitimate business decisions.
  • Accounting. How is the metric calculated? Who calculates it? What audit rights do you have?

Treat earnout consideration as worth significantly less than face value when evaluating the total deal price. Enforcement is expensive, post-closing disputes are common, and the acquirer controls the business.

Employee and Founder Treatment

The LOI should address — at least in outline — what happens to founders and key employees after closing. Key points include:

  • Whether founders are expected to remain with the acquirer and for how long.
  • Whether there is a retention package or employment agreement, and what the economics are.
  • Whether unvested equity will be assumed, accelerated, or cashed out (and on what terms — see our separate post on what happens to equity in an acquisition).
  • What termination rights apply to the post-closing employment arrangement.

If the buyer wants you to stay, they have leverage to offer favorable treatment. Use that leverage at the LOI stage, not after you have already committed to being acquired.

What to Push Back On

A few common LOI provisions that deserve scrutiny:

  • Exclusivity periods longer than 45 days without milestone requirements.
  • Material adverse change (MAC) definitions that give the buyer easy outs for ordinary business fluctuations — look for overbroad MAC definitions that include things like customer concentration or competitive developments.
  • Earnout metrics that the acquirer will control post-close, with no obligation to operate for earnout maximization.
  • Any provision that restricts how you can operate the business in the period between LOI signing and closing — buyer consent requirements for ordinary course decisions can be operationally disruptive.

The Bottom Line

Engage counsel before you sign the LOI, not after. The LOI negotiation is when you have the most leverage — you haven't given the buyer exclusivity yet. Once you sign, you have given up the ability to negotiate with other parties, and the non-binding terms in the LOI become the floor for every subsequent negotiation. Use the pre-LOI window to address as many of the economic and structural issues as possible.