Before formalizing an investment through the corresponding agreement, and of course prior to the due diligence to be performed by the investor, it is usual and highly recommended that the parties sign a document to reflect the intention of the parties which, depending on its scope and form, is articulated through a letter of intent (LOI), a memorandum of understanding (MoU) or a term sheet, which are cited in English by influence of Anglo-Saxon law. It is a pre-contractual document that sets out the preliminary terms of a possible transaction prior to the signing of a formal and binding agreement.
This document is characterized by the following points:
- It is a simple text, which escapes the detail of the investment agreements.
- In it, the parties state their intention to negotiate the investor's entry into the company's capital.
- A negotiation framework is established on the main aspects of the transaction (company valuation method, due diligence process and duration, possible guarantees, general structure, etc.).
- Although its content is generally not binding, it does include mandatory clauses such as confidentiality, which is very important since during the negotiation process the parties (especially the target company) will exchange sensitive information or, if applicable, the protection of industrial and intellectual property or the target's goodwill.
- Other clauses that are usually included and are of a mandatory nature may be the exclusivity period (either in favor of the company, in favor of the investor or both), the distribution of applicable expenses, the competent jurisdiction and the applicable law.
In short, the letter of intent sets forth the most relevant points of the transaction, anticipating issues that could be controversial in the future and establishing the general framework within which the parties will negotiate in good faith.
Although these brief documents may seem irrelevant, nothing could be further from the truth: once the letter of intent has been signed, it will serve as a guide for the drafting of future contracts, such as the investment agreement or, if applicable, the partners' agreement.
In BUSQUETS we are experts in advising in this type of operations, as much to investors as to companies that look for external financing, reason why if you have any doubt or you want that we accompany you in the process do not doubt in contacting us in info@busquets.legal or calling to 934 160 004.
We will be happy to help you.