LOI (Letter of Intent) in startup rounds and sales: what is binding, exclusivity, confidentiality, and timeline

A Letter of Intent (LOI) is the kickoff document that structures an investment or acquisition negotiation. It sets out the main commercial terms, the next steps, and a reasonable timetable. It does not replace the definitive agreement, but it aligns expectations, organizes the process, and reduces uncertainty.

Legal nature: what is binding (and what is not)

The general rule is clear: the LOI does not oblige the parties to close the deal. It usually includes a non-binding clause that excludes the signing of the final agreement and completion of the transaction from the scope of binding obligations. Even so, once the LOI is signed, two layers of obligations apply:

1) Duty to negotiate in good faith (move forward diligently, do not frustrate the process arbitrarily, communicate honestly). Breach can give rise to pre-contractual liability for reliance damages.

2) Clauses that are binding when agreed as such: exclusivity, confidentiality, allocation of expenses, governing law and jurisdiction, access for due diligence, and certain process commitments. These obligations are enforceable like any contractual covenant.

Exclusivity: negotiating on an exclusive basis for a period

The exclusivity clause (no shop) prevents the seller or the startup from seeking or accepting alternative offers for a period (typically 30 to 60 days in financing rounds). Its purpose is to give the lead investor or the buyer a real window to perform due diligence, obtain internal approvals, and negotiate definitive documents without interference. It is an obligation of strict performance: a breach entitles the other party to terminate negotiations and claim damages (advisory fees, internal time spent, and other provable losses).

Confidentiality: protecting the information and the process

The LOI usually contains, or reaffirms, a confidentiality obligation covering the negotiation and the information exchanged (including what is obtained during due diligence). Breach allows the injured party to seek cessation of disclosure and damages. Even if there is a prior NDA, it is common to keep this clause in the LOI to consolidate scope and remedies.

Timeline: milestones and deadlines through closing

The document sets a time roadmap (length of due diligence, target signing and closing dates, approvals and conditions). These are work deadlines, not guarantees of outcome, but they help keep momentum. Many LOIs include an expiry date and rules for extensions.

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What happens if the deal does not go ahead

Failing to sign the definitive agreement does not make the negotiation unlawful by itself. Practical consequences depend on what was agreed and how the parties behaved:

- End of exclusivity and of the LOI. If the period expires or a decision not to proceed is communicated in line with the LOI, the parties regain freedom to negotiate with third parties.

- Confidentiality remains. Confidentiality obligations (and, where applicable, return or destruction of information) remain in force for the agreed period even if the deal does not close.

- Expenses. Unless expressly agreed otherwise, each party bears its own costs. If the LOI provides for expense reimbursement (for example, due diligence costs) in certain scenarios, that will be enforceable as written.

- Information and materials. The usual rule is to return or destroy received information and not reuse it (including copies and internal notes), except for limited permissions stated in the LOI.

- Pre-contractual liability. If the breakup occurs without justification or in bad faith (for example, using exclusivity to run a covert auction, or walking away after inducing reliance-based investments), there may be a duty to compensate reliance losses. Recovery typically covers reasonable costs and provable lost opportunities (it does not amount to forcing the closing).

- Deposits or earnest money. These are uncommon in startup LOIs. If agreed, their regime should be clear to avoid interpretations that imply an unwanted commitment to close.

In short, if the transaction does not close, the process obligations agreed as binding remain in force (confidentiality, return of information, expenses) and, beyond that, the parties’ conduct is assessed to determine whether there was good faith or whether reliance damages should be compensated.

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What happens if the LOI is breached

Not all LOI obligations have the same effect. Breach is assessed according to the clause involved:

- Exclusivity breach. Allows the other party to terminate negotiations and claim damages (advisory fees, internal time, lost opportunities tied to exclusivity). If a liquidated damages clause or break fee exists, it will apply, subject to possible judicial moderation if disproportionate. In some cases interim measures can be sought to stop parallel negotiations while damages are determined (case dependent).

- Confidentiality breach. Entitles the injured party to seek immediate cessation, injunctive relief, and damages. The obligation typically survives the end of the LOI for the agreed period.

- Breach of process commitments (for example, failure to provide minimum information for due diligence, failure to pursue promised internal approvals, failure to negotiate diligently). This can trigger pre-contractual liability if it unjustifiably frustrates progress or contradicts what was signed.

- Breach of expense clauses. If reimbursement was agreed for certain scenarios and is not paid, a direct claim for those amounts is available.

- Specific performance. As a rule, courts will not force the parties to close the deal. They can, however, order specific performance of clear instrumental obligations (for example, stopping talks with third parties during exclusivity, returning documents, maintaining confidentiality).

In all cases it helps to have a clear LOI that distinguishes what is binding from what is non-binding, defines remedies and reasonable liability limitations, and sets governing law and forum (or arbitration).

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Best practices for startups

Draft an LOI that: (i) includes a non-binding clause regarding closing, (ii) precisely defines exclusivity (scope, duration, exceptions), (iii) reinforces confidentiality and information handling, (iv) sets a timeline and expiry date, (v) allocates expenses and reimbursement conditions, and (vi) provides dispute resolution mechanisms (mediation and arbitration are common). Check compatibility with the shareholders’ agreement and bylaws (for example, rights of first refusal and limits on issuing shares or quotas).

Conclusion

An LOI combines flexibility (no obligation to close) with concrete commitments that ensure an orderly process (exclusivity, confidentiality, timeline, and expenses). If the deal does not proceed, process obligations survive and there can be liability for bad faith. If the LOI is breached, remedies are essentially contractual (damages, liquidated damages, specific performance of instrumental obligations). A balanced and clear letter of intent reduces friction, protects the startup and the investor or buyer, and helps the parties reach the definitive agreement with confidence.