Tuesday, August 16, 2011

Letters of Intent: Don't Sign Just Yet

OK, you have found the holy grail, an investor willing to finance your idea or company. After the initial euphoria, you are presented with a Letter of Intent or Term Sheet drafted by the investor's legal counsel. Don't let your excitement keep you from thinking clearly and signing without proper review. There are pitfalls to be concerned with, for example: (1) Even an LOI titled "Non-Binding" can have terms that are in fact binding (i.e., No-Shop Clause); (2) A non-binding LOI will be the roadmap for the investment documents, making it difficult to argue against certain unfavorable terms later on without jeopardizing the deal; and (3) There are many terms you should not accept without pushing back (valuation, investor vs. founder stock rights, conversion rights, Board seats, control/management of the company, right to transfer stock, and many more).

BOTTOM LINE: Don't sign a term sheet without review by a seasoned business lawyer.

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