How to Craft Investor-Worthy LOIs

By Steve Weiss, co-founder and CEO of Grey Heron, and long-time member of the Due Diligence Wolfpack
Special to The Digest

Getting your prospects to sign meaningful LOIs is your gateway to lots of benefits: getting other partners to move forward with you, getting investors to sign up – and simplifying final agreements with the prospects themselves. A weak LOI, on the other hand? It’s not going to move the needle.

Specificity is your friend

A good, impactful LOI (letter of intent, memorandum of understanding, MOU) is specific.

The purpose of an LOI is to show that the parties are seriously on a path to completing an agreement, whether for offtake, distribution, co-development, co-marketing, or whatever.

This matters – big time – to potential investors and other partners. For example: let’s say you’re looking to raise a few hundred million (or couple billion) for a first-of-its-kind biochemicals, SAF, battery recycling, water treatment or materials upcycling project. Investors will want to see solid, binding offtake agreements for a majority of your capacity, on ‘investor-grade’ terms. But knowing that can take a while, it’ll be useful to first show LOIs that cover the key details so you can begin financing discussions in earnest. For earlier stage companies, many investors will look at your LOIs – if detailed – as leading indicators of potential interest in your offerings.

The more detail, the better – versus merely expressly general intentions and interest. There are two main reasons for this:

• Accelerate time to close: Capturing key details in the LOI leaves fewer items to negotiate later. Additionally, the detailed LOI signals to your prospect’s team that this is real, not just an empty expression of goodwill. More detail suggests a higher probability of close, too.
• It’s a show of substance to other parties you’ll need to line up: Detailed LOIs show that you’ve already had the conversations about the hard stuff, and that you’re on the same page. While that’s not a guarantee you’ll close on those terms, it goes a long way toward showing it’s likely. That signals it’s worth it to others to invest the effort to evaluate working with you as well.

Capture the most important terms with clarity, precision and substance

Here are some of the top items I try to capture:

1. Shared vision: Start with a preamble that captures why the parties are really looking to do this deal. This isn’t the usual ‘whereas ABC has products that (do something) and XYZ (likes those products)’. Instead, capture why the agreement is strategic to the parties: e.g., ‘we’re interested because your product has the potential to deliver half of our 2030 carbon reduction target’; or ‘we anticipate your product could allow us to make higher-performance formulations that open a new $xxxM market opportunity for us’. This preamble will show that you’re really on the same page – and serve as an important reminder to everyone that works on the deal that this shouldn’t just be about the procurement team finding the lowest-cost item. Many legal teams will look to eliminate these sentences along the way, as they don’t speak to the deal itself. Don’t let them: explain that this will be useful to you in convincing others, and including these has no downside to them.
2. Key business terms: The more detail the better, re price, volume, term, shipping costs, tariffs, potential credits, etc. Include formulas or indices where appropriate, along with ceilings or floors. If a purchase agreement, can the buyer sometimes decline volume, or the maker sometimes choose not to produce? Including the details here will allow others – like investors – to understand the true economics and risks of your venture. Try to eliminate as many gotchas or ‘offramps’ as possible – investors will always look at worst-case scenarios.
3. Dependencies, including specs: If you need to meet certain specs, now’s the time to document them, rather than leaving these as to-be-negotiated items. Likewise, capture any other dependencies, like government approvals, permitting, securing financing, etc.
4. Messaging and marketing: Many LOIs include generic language about ‘the parties will collaborate on potential press releases’. Don’t settle for that. This is a really good time to surface and agree on specific messages and timing, as the parties may have different needs or sensitivities about what to say and when. Figure it out now and avoid headaches later.
5. Timing: Include language about a target date for completing a binding agreement. This will help with outside parties to show that this LOI is more than just ‘for show’. If there’s pushback from the other party, remind them that it’s a non-binding LOI, but it’s good for both parties to be aligned on targets.

More help: articles and videos on strategy, fundraising, offtake and more

For a deep dive on related topics, check out the articles and videos below:

Above: articles and videos on fundraising, offtake and messaging at the Grey Heron website.

*The Due Diligence Wolfpack was started several years ago by Jim Lane, and is featured on Digest TV, at the ABLC conferences and on webinars. Per Jim, the Wolves “devour hype, in search of value.” I’ve had great fun ‘critiquing’ over 40 companies and technologies to date.

Steve Weiss is co-founder of Grey Heron, a management and strategic marketing consulting firm. Since 1993, the firm has helped executives and investors at over 150 companies build value and become leaders in their sector, through strategy, fundraising, positioning and partnerships. Fields include climatetech, food, advanced materials, and cloud/SaaS/AI. Within renewable chemicals, materials and fuels, Steve has helped build Future Origins, Genomatica (aka Geno), Oberon Fuels, Cellugy, Biosphere, Sortera, DAB.bio, NovoNutrients and Liquid Light (acquired by Avantium), and is a proud member of the Due Diligence Wolfpack (watch our sessions on plastics and packaging, carbon capture, use and sequestration, and pivots). Contact Steve at weiss@greyheron.com; see Steve’s LinkedIn profile; listen to his “Science of Yes: Positioning and Messaging for Success”.