A buyer reaches out, the calls go well, and a short letter arrives with a number on it. Many founders can’t tell whether it’s a letter of intent (LOI) or an indication of interest (IOI), so they treat it as an offer. In reality, signing the wrong one too early can cost you your other bidders, weeks locked in exclusive talks, and a purchase price negotiated down once your alternatives are gone.

I built two software companies before I became a startup lawyer. Here is what each document commits you to, and what to fix before you sign.

What Is an Indication of Interest (IOI)?

An indication of interest is the first written signal that a buyer is serious about acquiring your company. The IOI usually arrives after you have signed a nondisclosure agreement (NDA) and shared summary materials, such as a teaser or a confidential information memorandum (CIM), and before the buyer has seen much beyond your headline numbers.

Most IOIs cover the same ground:

• ●A valuation range instead of a single purchase price
• ●The proposed structure, such as a stock purchase, an asset purchase, or a merger
• ●How the buyer plans to pay, whether in cash, buyer stock, debt financing, or an earnout
• ●The assumptions behind the range, such as annual recurring revenue (ARR), growth, and customer retention
• ●The diligence the buyer still needs and a rough timeline
• ●What the buyer expects from you and your team after closing

The buyer usually signs the IOI alone, and the letter states that it creates no obligation to complete a deal. The buyer can lower the range, change the structure, or walk away without owing you anything.

When a founder forwards me an IOI, the first line I read is the assumptions line. If a range rests on, say, $4M in ARR and diligence shows $3.4M, expect the buyer to apply the same multiple to the lower number.

What Is a Letter of Intent (LOI)?

A letter of intent is a buyer’s proposal to acquire your company on specific terms, signed by both sides. The LOI comes later than an IOI, after the buyer has met your team and done enough early diligence to commit to one purchase price.

A typical LOI spells out:

• ●The purchase price and how much of it is paid in cash or stock of the acquirer at closing
• ●The structure (stock sale, asset sale, or merger) and any rollover equity
• ●Escrow or holdback amounts, indemnification terms, and any earnout
• ●A working capital target and how the price adjusts if you close below it
• ●Key conditions, such as financing, approvals, and employment terms for the founders
• ●The exclusivity period, confidentiality, expenses, and governing law
• ●A statement of which sections bind the parties and which do not

Most of the economics in an LOI stay non-binding until the definitive purchase agreement is signed. In practice, though, the buyer’s lawyers draft that agreement from the LOI, so every vague term becomes a term the buyer gets to define later. As I put it to sellers, the terms in this document “lock in 90% of how the rest of the deal plays out.”

How Do an IOI and an LOI Compare Side by Side?

Here is how the two documents differ on the points that shape your sale.

Where Do the IOI and LOI Fall in a Sale Process?

A sale run by a banker or broker usually moves through five stages, and each document marks a gate between two of them.

1Confidentiality Agreement and First Materials

The buyer signs an NDA before you share anything confidential or proprietary. Then it receives a teaser or a CIM describing the business, the customers, and the financials at a summary level.

If the buyer competes with you, decide now what you will hold back until later stages, such as customer names and pricing.

2The IOI Round

Interested buyers submit IOIs, ideally by a common deadline so you can compare them side by side. You and your advisors pick a short list to advance, and the others drop out or revise their ranges.

3Management Meetings and Early Diligence

The short-listed buyers meet your team, ask harder questions, and test the assumptions behind their ranges. Expect requests for cohort data, churn, and your largest customer contracts.

4The LOI and Exclusivity

One or more buyers submit LOIs, you negotiate the terms, and you countersign the LOI from the buyer you choose. Exclusivity usually starts at signature, and the buyer begins full diligence.

5The Definitive Agreement and Closing

The buyer’s lawyers typically draft the purchase agreement from the LOI, including the representations and warranties you will make about the business. Signing and closing can happen together or weeks apart, depending on the approvals and consents the deal needs.

Which Parts of Each Document Actually Bind You?

The label at the top of the page matters less than the words inside it.

What “Non-Binding” Means Under Delaware Law

Delaware courts, following a framework developed by federal courts in New York, sort preliminary agreements into two types:

• ●Type I: every essential term is settled, and the agreement binds the parties even if the formal contract is never signed.
• ●Type II: some major terms are settled, and the parties are bound only to negotiate the open terms in good faith.

The second type has real teeth. In SIGA Technologies v. PharmAthene, signed agreements required the parties to negotiate a license in good faith on the terms of an attached term sheet.

The Delaware Supreme Court held in 2013 that where the parties agreed to negotiate in good faith and would have reached a deal but for one side’s bad faith, the other side can recover expectation damages (the value of the deal it lost), provided it proves them with reasonable certainty. In December 2015, the court affirmed a $113 million award on that basis.

Before you sign, check your LOI for three things:

1. 1An express statement that the price and other economic terms are non-binding
2. 2Any promise to negotiate “in good faith,” which can create a Type II obligation
3. 3Wording that says the parties “agree” to the price, where “propose” is safer

Other states treat preliminary agreements differently, so have your lawyer check the governing law clause as well.

The LOI Clauses That Bind on Signature

Most LOIs list the sections that bind the moment both sides sign. Here is what each one typically does and what I usually ask for on the seller’s side.

The remaining terms, such as the price, escrow, working capital, and earnout, are usually non-binding, yet they set the baseline for the purchase agreement. I cover how those terms shrink the headline number in my guide on when to bring in a deal lawyer.

When an IOI Behaves Like an LOI

Sometimes a buyer slips an exclusivity clause or a good-faith negotiation promise into a document titled “indication of interest.” Read that document as an LOI. If you sign it, you may give up your other bidders before you know the buyer’s real purchase price.

My usual fix is to strike the exclusivity language and the good-faith promise, then add a sentence confirming that nothing in the IOI binds either side beyond any confidentiality terms.

How to Respond When a Buyer Skips the IOI

Plenty of founder-stage SaaS sales start with no banker and no IOI round. A buyer approaches you directly, and the first document you see is an LOI with a price and an exclusivity clause. Here is how I would handle it:

• ●Hold the signature. An unsolicited LOI is an opening position, and countersigning it starts exclusivity before you know what else is available.
• ●Create your own IOI round. Contact other likely buyers, such as strategic acquirers in your space and private equity firms that own similar products, and ask for an IOI by a set date.
• ●Ask for the math. Get the first buyer to state the ARR, growth, and retention figures behind its price, so you can see what diligence could change.
• ●Compare structure along with price. Cash at closing, escrow, and earnout terms can make a lower offer worth more than a higher one.
• ●Grant exclusivity last. Give it only in exchange for a firm purchase price and a committed diligence timeline.

What to Negotiate at Each Stage

What you can win depends on where you are in the process. You have the most room at the LOI stage before exclusivity starts, and the least once it does.

At the IOI Stage

You are mostly gathering information, so push for clarity over concessions:

• ●The assumptions behind the range, in writing
• ●The source of the buyer’s financing and any approvals it needs
• ●Whether the buyer wants a stock purchase or an asset purchase
• ●The diligence list and a realistic timeline to an LOI
• ●The roles the buyer expects you and your key people to play after closing

At the LOI Stage

Every term you leave vague here becomes one the buyer drafts in its own favor later. Before you countersign, pin down:

• ●Purchase price and cash at closing. One number, with the amount paid at closing stated in dollars.
• ●Structure. Stock sale, asset sale, or merger, with the tax consequences modeled by your tax advisor.
• ●Working capital and deferred revenue. Many SaaS companies bill annual subscriptions up front, and buyers often treat the unearned portion as a liability that reduces the price, so settle the calculation method now.
• ●Escrow and indemnification. A defined holdback held in escrow, a cap, and a survival period, written out instead of left as “customary” terms.
• ●Earnout definitions. The metric, how it is measured, and what the buyer may not do to depress it.
• ●Exclusivity. A fixed number of days, no automatic extension, and early termination if the buyer lowers the price or changes the structure.
• ●Employees. Which team members receive offers, and on what terms.

What the Deal Structure in Your LOI Sets in Motion

The structure line looks like a single phrase, yet it shapes your tax bill, your filings, and sometimes your regulatory timeline.

Stock Sale or Asset Sale

The structure line decides what you actually sell and how your gain is taxed.

Qualified Small Business Stock (QSBS) relief under Section 1202 lets an individual exclude part or all of the gain when qualifying shares are sold or exchanged, and it is a federal exclusion only. California does not conform, so a California taxpayer owes California tax on the full gain. For the wider trade-offs, see my breakdown of stock and asset purchases.

Purchase Price Allocation in an Asset Deal

An asset deal also means agreeing how the purchase price is split across the assets you sell. When goodwill is part of what the buyer acquires, IRS rules require you and the buyer to each report the sale and the allocation on Form 8594. The allocation drives how each asset is depreciated and taxed, so agree on the method in the LOI or early in the purchase agreement.

Antitrust Filings on Larger Deals

Some acquisitions are large enough to require a premerger notification to the Federal Trade Commission (FTC) and the Department of Justice under the Hart-Scott-Rodino (HSR) Act. If yours might be one of them, two points matter at the LOI stage:

• ●Under the FTC’s premerger notification rules, a filing can rest on an executed letter of intent or agreement in principle, supported by the filer’s affidavit of its good faith intent to complete the deal.
• ●The reporting thresholds are adjusted every year, so ask your lawyer early whether your deal is reportable.

Frequently Asked Questions

Quick answers to the questions I hear when a buyer’s first letter shows up.

Before You Sign Either Document

An IOI tells you who is interested and roughly at what price. An LOI decides who you will negotiate with, whose draft you will work from, and how long you are off the market. Keep buyers competing through the IOI stage, and treat every term in the LOI as the floor for the purchase agreement that follows.

When a buyer’s letter arrives, send it to a deal lawyer before you reply with anything more than thanks.