An investment letter of intent, or letter to invest, is a formal document used to outline the proposed terms and conditions of a business deal or transaction with another party. It serves as the starting point for negotiations and can be either binding or non-binding. This offer represents a financial commitment toward ownership of a portion of a business or real estate.
The LOI includes essential details such as the amount being invested and the percentage of ownership or number of shares the investor will receive.
When to Use
A letter of intent for investment ensures both parties are aligned before incurring due diligence costs and drafting a formal agreement. It’s beneficial in the following scenarios:
- Mergers and Acquisitions: Allows a prospective investor to express interest in investing in a business, detailing the proposed price and terms, setting the stage for detailed negotiations.
- Joint Ventures: Companies can use an LOI to propose collaboration on a specific project, outlining roles, responsibilities, and the duration of the partnership, ensuring alignment from the start.
- Real Estate Transactions: Allows investors to initiate negotiations with property owners, detailing investment terms and contingencies, serving as a preliminary agreement to streamline the process.
What to Include
Serving as a preliminary document, it precedes a more detailed and extensive contract. Here are the key elements it should include:
Basic Information
- Party Information: Clearly state the names of both the proposing party (individual or company) and the recipient.
- Purpose: Define the primary objective of the LOI.
- Date: Include the date when the LOI is effective.
Investment Highlights
- Investment Amounts: Specify the total investment amount.
- Type of Investment: Define the nature of the investment (e.g., equity, debt, real estate, business acquisition, joint venture, partial ownership, or partnership).
- Payment Details: Specify the payment recipient and the ownership percentage or shares to be received. Mention if the agreement is contingent upon the investor securing financing.
- Use of Funds: Describe how the investment funds will be allocated.
Key Deal Terms
Outline the fundamental terms of the deal, recognizing that these are not yet finalized:
- Use of Investment Funds: Detail how the funds will be utilized within the business or project.
- Valuation: Provide pre-money and post-money valuation estimates.
- Due Diligence: Outline the process and scope of due diligence to be conducted by the investor.
- Period of Exclusivity: Define the exclusivity period during which the recipient cannot negotiate with other potential investors.
Confidentiality Clause
Emphasize the parties’ duty to keep all investment-related information confidential unless prior written permission is given. This can be secured further by an NDA.
Timelines and Milestones
Highlight important dates, such as:
- Effective date of the LOI.
- Deadline for finalizing the formal agreement post due diligence.
- Date for returning a signed copy of the LOI.
- Signing dates by both the investor and the recipient.
Termination and Legal Binding
- Termination Clause: Specify conditions under which the LOI can be terminated.
- Binding Nature: Clarify which parts of the LOI are legally binding and which are not, typically noting that the LOI is non-binding except for certain clauses (e.g., confidentiality, exclusivity).
Next Steps
Prepare an action plan and outline the steps to be taken following the signing of the LOI, including the preparation of a more detailed agreement and any interim actions required to finalize the transaction.
Signatures
- Signatories: Provide space for the signatures of all involved parties, including their printed names and titles.
- Electronic Signing (eSigning): Include provisions for electronic transmission and signing of the document.
Investment Letter of Intent Sample
