How letters of intent increases startup funding success
What is a letter of intent? Who are they for? Are letters of intent outdated? Are they legally binding? How is it related to funding? How does it increase my conversion metrics as a startup?
Let’s take a look deeper into one of the important elements of startup conversion called letter of intent. We have come across this topic when one of our startup clients who is preparing for funding using www.venturx.ca suggested for more information about letters of intent and how it would affect his Conversion score on the VenturX tool. Let’s dive in and answer all those buzzing questions!
What is a letter of intent?
A letter of intent outlines the terms of a deal and serves as an “agreement to agree” between two parties. They are usually not legally binding but it depends on how it is written. Most partners, investors, merchants, etc.. tend to favour those that are not legally binding. Below, there are a few examples of letters of intent.
How does a letter of intent help me get startup funding?
Startups are always trying to defend their valuation of their business when it comes to funding. The truth is that most startups do not realize the gold and leverage they tend to have. Even when you cannot show revenue, you can certainly show traction. A written agreement proving the interest or partnership of another party is certainly a strong way to show traction. When you are up for investor funding, the investor has more confidence in what is presented when there are contact details, price points, etc.. on these letters.
Who should startups get letters of intent from?
There are several sources that startups could be collecting the letters of intent from.
1) Potential investors — startups might hit need to hit a certain milestone (ex. Patent approval) in order to get the potential investment. Like a term sheet, this letter assures other investors that your startup is valued at that particular pre-determined valuation. These would be used to back up those claims.
2) Clients — this works very well with Business to Business (B2B) clients. For example, before putting in a purchase order, the business you are trying to sell to might want to see test results, patent approvals, etc.. These terms would be written into the letter of intent.
3) Partners — there are many different kinds of partnerships. For example, a referral partnership would be when two parties refer clients to each other in exchange for a commission fee or just out of goodwill. When startups do not have a full product yet in order to sign a referral partnership agreement contract, a letter of intent could take its place until development is completed.
What should be included in a letter of intent.
1) Language and Tone: Think about who the letter of intent is for. For example, if you are a VenturX startup aiming for funding, your letter of intents would be read by the investors that VenturX matches you with. Therefore, your letters of intent would cater to the language of investors.
2) Pricing, dates of delivery, etc.. — if you have agreed on pricing, dates of delivery, etc.. that is great to add because it strengthens your letters of intent. Note that if deadlines are not met, you can send an updated letter of intent to be signed for the updated estimated delivery date. Specific details are better to be included when a third party is reading it because there is context and clarity.
3) Signatures — be sure that whoever’s signatures are on the letters of intent are the head decision maker and not likely to change jobs anytime soon. If this happens, you may need to spend more time getting another signed letter.
1. Purchasing Letter of Intent
This letter of intent includes details such as the pricing, who is buying, etc. It is a great example because these detail tell the investors that there is definitely traction in the pipeline. It helps support the analytics of the VenturX report for that company.
LETTER OF INTENT FOR PURCHASE OF COMPUTER EQUIPMENT
March 11, 20xx
OBJECT: LETTER OF INTENT FOR PURCHASE OF COMPUTER EQUIPMENT
Dear [CONTACT NAME],
[YOUR COMPANY NAME] intends to purchase certain computer hardware from [SELLER]. The purpose of this Letter of Intent is to summarize our discussions to date and to confirm our respective intentions with respect to the proposed transaction.
[YOUR COMPANY NAME] intends to purchase from [SELLER] the [MODEL] computer.
The purchase price for the [MODEL] model shall be the lower of [AMOUNT] or whatever better price [SELLER] is able to extend to [YOUR COMPANY NAME].
[YOUR COMPANY NAME] and [SELLER] will use their best efforts to conclude a contract on or before [DATE].
In order to secure timely delivery of the equipment [YOUR COMPANY NAME] has paid to [SELLER] the sum of [%] of the listed price as a deposit, which shall be promptly refunded in the event negotiations are terminated.
In the event that a contract is not signed on or before [DATE] for any reason whatsoever, [YOUR COMPANY NAME] or [SELLER] shall each have the right to terminate the negotiations without liability.
This document is a Letter of Intent only. It is not intended to be, and shall not constitute in any way, a binding or legal agreement, or impose any legal obligation or duty on either of us. If the foregoing reflects our mutual statement of intention, please sign and return the enclosed copy of this Letter of Intent.
FOR [YOUR COMPANY NAME] FOR [SELLER]
Authorized Signature Authorized Signature
2. Purchase with Deposit/Escrow
This letter of intent is a great example even if your industry is not real estate. The timeline details as well as the deposit procedure details are included. It allows investors to visualize how the process is going to go. Even though the investors may be familiar with the industry standard deposits or escrow, it is always good to include the details in it so everyone is on the same page.
LETTER OF INTENT
This letter sets forth some of the basic terms under which Seller and Purchaser would be interested in entering into a Real Estate Purchase Agreement. It serves as a letter of intent (“Letter”) from _________________________ (“Purchaser”) through and dated ______________, 2010, in which Purchaser has set forth its interest in acquiring the subject Property. NEVERTHELESS, PLEASE BE ADVISED THAT THIS LETTER IS NOT CONTRACTUALLY BINDING ON THE PARTIES AND IS ONLY AN EXPRESSION OF THE BASIC TERMS AND CONDITIONS TO BE INCORPORATED IN A FORMAL WRITTEN AGREEMENT.
(hereinafter, the “Property”)
c/o Silo Group, LLC
7800 W Sand Lake Rd, Suite 210
Orlando, FL 32819
The Purchase Price shall be $___________
_________________ dollars ($_________) (“Earnest Money”) shall be placed in escrow with the Title Company upon the execution of the Purchase and Sale Agreement (defined below). Upon expiration of the Due Diligence Period (defined below) and provided Purchaser does not terminate the Purchase and Sale Agreement before expiration of the Due Diligence Period, the Earnest Money shall become non-refundable.
DUE DILIGENCE ITEMS:
Within five (5) days after the Effective Date. Seller, at its expense, shall provide Purchaser with the following items, if any, in Seller’s possession:
A copy of the most recent title commitment for the Property
Items (a) through (d) above and the updated title commitment and updated survey, if applicable, are hereinafter referred to as the “Due Diligence Items”.
DUE DILIGENCE PERIOD:
Purchaser shall have up to ____________ (__) days from the Effective Date (the “Due Diligence Period”), to review the Due Diligence Items and to enter upon the Property to inspect the physical condition of the same, as it shall deem necessary. On or before expiration of the Due Diligence Period, Purchaser shall determine whether it is feasible to purchase the Property based on Purchaser’s review of the Due Diligence Items and its physical inspection of the Property. If it is not feasible for Purchaser to purchase the Property, Purchaser may terminate the Purchase and Sale Agreement. If Purchaser so terminates, the Earnest Money shall be returned to Purchaser, and the Due Diligence Items shall be returned to Seller.
Upon the mutual execution of this Letter, Seller will promptly prepare a Purchase and Sale Agreement and Seller shall make a good faith effort to deliver said Purchase and Sale Agreement to Purchaser within five (5) days from the effective date of the LOI.
Special Warranty Deed or the equivalent thereof in the State where the Property is located.
Closing shall occur on a date mutually acceptable to purchaser and seller, no later than ________ (__) days after the effective date.
Closing Costs shall be paid according to local custom, further detailed in the Purchase and Sale Agreement.
Purchaser and Seller each represent that no real estate broker, finder or intermediary has been consulted or used in connection with the purchase and sale of the Property except Silo Group, LLC. Silo Group, LLC shall be compensated upon Closing by Seller pursuant to a separate agreement with Seller.
Seller, Purchaser, and their agents shall maintain the confidentiality of the parties, terms, and conditions of this letter and the negotiations that may follow, if any, from this date forth.
The above items are the general business terms and conditions to be covered in the Purchase and Sale Agreement, which would be submitted to the Seller. Additional remaining terms of the Purchase and Sale Agreement will be negotiated and must be acceptable to both Purchaser and Seller.
This Letter is not intended to be a binding contract.
If this Letter accurately reflects the general business terms and conditions which may form the basis of a separate written agreement, please confirm in writing no later than ______________, 2010.
Buyer hereby agrees to the terms and conditions of the Letter.
By: ________________________________ ____________________
Name: _____________________________ ____________________
Seller hereby agrees to the terms and conditions of the Letter.
By: ________________________________ ____________________
Name: _____________________________ ____________________
3. Purchase Upon Due Diligence and Shipping Details
This example gives details about how the inspection or due diligence will take place. These details are good to give assurance to investors because depending on the situation, investors may also offer a second round of due diligence. If the inspection/due diligence is being serviced by a trusted third party, that is even better. The delivery details also gives an overview of the timeline when things will take place. This transparency in the letter increased trust level between the parties.
AIRCRAFT PURCHASE OFFER
Ref: _________________ S/N ___________ Registration: _________ (the “Aircraft”)
Subject to ratification of a mutually agreeable Aircraft Sales Agreement within 5 business days, Purchaser offers to purchase and Seller agrees to sell the above referenced Aircraft subject to the following:
1. Purchase Price: The purchase price shall be $ _____________________________________ USD
2. Deposit: Upon ratification of this Offer, Purchaser shall make an immediate refundable escrow deposit in the amount of $ ________________USD to _______________________________ (“Escrow Agent”) within 1 business day. Purchaser and Seller shall share escrow fees equally. Time shall be of the essence.
3. Inspection: This Offer is subject to Purchaser’s satisfaction with a visual inspection of the Aircraft and records to be completed within 3 business days followed by a technical inspection (hereafter “Inspection”) of the Aircraft, engines, avionics, logbooks and records including a test flight of one hour, to be commenced within 5 days at _______________________________ or other mutually agreed upon facility to determine the Aircraft is in compliance with Paragraph 5 below. Purchaser expressly agrees that all costs of the visual or technical Inspection and the movement expenses shall be for Purchaser’s account and pre-paid in advance. The Aircraft shall not be flown, except for delivery, following the Inspection.
4. Acceptance: Prior to rectification of any discrepancies found during the technical Inspection, Purchaser shall accept (“Acceptance”) or reject the Aircraft in writing within 2 days following completion of the technical Inspection. Upon Acceptance, the deposit shall become non-refundable, subject only to Seller’s performance hereunder.
5. Condition: Aircraft shall be delivered at the Seller‘s expense:
(1) With all airworthy systems and avionics functioning normally
(2) Current on it’s maintenance program with no deferments or extensions;
(3) With all AD’s and mandatory SB’s accomplished
(4) With all records, logbooks, flight manuals, and accessories in owners possession;
(5) Free and clear of all liens or other encumbrances.
6. Delivery & Closing: Final payment & Delivery for the aircraft shall occur simultaneously at ___________________________________ within 3 business days following Sellers compliance with Paragraph 5 above through the Escrow Agent. Prior to delivery, Seller shall execute and place a Bill of Sale with the Escrow Agent. This contract and all negotiations shall remain strictly confidential.
7. Additional Terms: ___________________________________________________________
(Company name) (Company name)
Title: _____________________________ Title: _______________________________
Date: _____________________________ Date: _______________________________
The examples show that there are different styles for letters of intent. It highly depends on what industry the business is in. When reviewing it, make sure to include all the details mentioned in this article and your business will be one step closer to your funding goal.