A business newly created in testing & selling a new product idea in the market is called a startup. A startup is simply a new company trying to create an attractive business model for new products as against older companies already entrenched with a successful business model & focused on executing it successfully.
A startup usually starts with a new product idea & needs to launch it to test its viability in the market. Along with that comes the need for commitment from investors or clients in launching the product on a much large scale. Data collected from MVP (Minimum Viable Product) does not give you the actual account of whether customers will actually buy the product or not. Post MVP, the desire is to test it in the market but at the same time, the need is also to satisfy investors ensuring market success for the product. Investors have to be convinced about the client’s commitment to buying the product.
But the client who is yet unsure whether the product promoted by the startup will help in solving his problem will not legally bind himself in buying the product. Instead, he would look for an agreement that looks to commit him to buy the product only in case if it actually works, without legal binding. Even the investor would look for a similar sort of agreement, a commitment, without legal binding.
This need for an agreement without legal binding is called the letter of intent (LOI).
The Letter Of Intent:
Simply said the letter of intent is a legal document declaring the initial commitment & understanding between two or more parties. The LOI is intended to be formalized into an agreement post success of the product or the services & as agreed upon.
The Letter of Intent (LOI) content is quite similar to the Memorandum of Understanding (MOU), Term Sheets, etc. The difference is only that while the LOI is designed in the form of a Letter, the MOUs, term sheets, etc. outline & conform to spreadsheets. The LOIs forms the initial form of commitment before forging an agreement in several business transactions.
The Letter of Intent usually is not legally binding since it’s just an initial business proposal between two or more parties in legal writing. The Letter of Intent or agreement to agree letter is usually time-bound & can be canceled at any time by any of the parties.
How Does the Letter of Intent Help Startups:
Startups are usually on the lookout for funds in propagating their products or services. They tend to defend their business’s projected valuation to use more funds for their products from investors. But the investor has to be provided with ample details of projected sales before he starts funding the project since the startup is not in a condition to put in investment funds.
So, for startups to gain proper investor funding, a written agreement must be presented to build the investor’s confidence. An agreement in the form of a letter of intent with details of the type of business, price & profit factors, contact details, etc. all written formally.
Different Types of Letter of Intent for Startups:
Startups can receive the letter of intent from many sources ranging from:
1. Probable Investors: Funding for startups becomes extremely essential at a certain point for foraging into the market post successful initial launch. If not the initial market trust gained would be lost or taken over by some other making the earlier launch absolutely worthless. The letter of intent becomes the potential business guideline sheet which details the value of the startup & other related information for positive investment funding. The letter of intent with the startup value & overall project valuation as claimed in the letter is taken as a commitment by the investor in going forward.
2. B2B Clients: The letter of intent works very well with business to business clients. This becomes a formal document regarding the quality of the product or the service being sold or accepted, importantly test results, approvals, etc. put up in writing. The LOI in this case especially helps the startup build-up valuation of his product or services being marketed.
3. Partnership: There are various kinds of business partnerships. Other than a normal partnership or tri-party party or multiple partnerships, there is a referral partnership. In a referral partnership, two parties refer clients to each other for a price or out of goodwill in the LOI & to be left out later in the actual agreement. This usually happens when the startup is yet to conceive the complete product. Due to that a formal referral partnership agreement by way of LOI is initiated as the commitment to the project.
The Letter of Intent should be underlined with positivity, especially for a startup. Such as:
- The tone & the language of the letter are very important. In the case of a letter from a startup, the language of the LOI should be confident & should match the investor’s vocabulary.
- The LOI aimed at receiving funds from the investor should be accurately written invalidating the startup & effects’ value.
- Inclusion of agreed pricing, date of delivery, etc. further helps strengthen the letter of intent. It also helps in informing the clients on the difficulty of meeting delivery deadlines leading to an updated letter of intent to be signed with the new estimated date of delivery. The letter of intent should be specific, detailed & with clarity especially when a third party involvement is notified in a commitment agreement.
- The letter of intent of a startup should have signatures of the main decision-makers but expectedly only those who wish to fulfill the said project. If consented partners of the startup project shift-over to other jobs or projects during that time, it might result in you going for another signed letter.
Formulating Your LOI as a Startup:
The letter of intent for startups can be formulated in four categories:
- Introduction: Defining to expedite projects with no extra cost to the companies & being non-binding as far as agreements or LOIs are concerned.
- Benefits to the Client: Explaining to the clients about the benefits of the product market-wise.
- Quality & Features: This is a feature required in giving the client that kind of impetus required to his funding the startup project.
- Client Commitment: It all depends on an investor wanting to put money into a project, especially a startup.
Every startup is different in its category & it is not required to regulate to the above-mentioned points in creating an LOI. But giving utmost care when creating the LOI whenever or wherever might help you in keeping the proper balance between the business process & legitimacy.
