Tips on Writing a Good Investment Letter of Intent

Here are several tips that will help you craft an effective letter of intent that will lead to a beneficial formal agreement in the future.

Recommendation 1

Don’t write too much. The letter should be concise and to the point (the same applies to many other letters of intent
). It is not a binding document, but it can be used as a tool to open up negotiations about an investment.

Recommendation 2

Turn to a high-post person. The letter should be sent to the decision maker in the company. This is usually the CEO or the board of directors.

Recommendation 3

Keep your intentions clear. The letter should be explicit regarding what the investor is looking for. The company should know exactly what they want in return for their investment.

Recommendation 4

Conduct proper research. It is important to do your homework before sending an investment letter of intent. You should research the company and its financial situation before making any commitments.

If you are serious about investing in a company, an investment letter of intent can be a helpful tool. It can help you open up negotiations and get the process started.

How to Fill Out an Investment Letter of Intent

An investment LOI has to cover a broad range of details in order to show the potential investor’s serious intentions and the attractiveness of the possible deal.

Step 1 – Date and purpose

The letter should begin with the date the investment will take place, as well as the purpose of the letter.

Step 2 – Information about the investor and the investee

Then, it should mention the name of the investor and the company or business entity that will be receiving the investment funds. The letter should include the address of both sender and the addressee (including street, city, state, zip code, and post office box address).

Step 3 – The size of the investment

One of the key aspects in such an agreement is describing the amount of money that will be owed by the closing date.

Step 4 – Main shareholders

The fourth section should list the primary stockholders of the business that is receiving the investment.

Step 5 – The number of shares

The quantity of shares that are about to be bought should be mentioned in this section. The letter should state that those stocks need to be free of any liens, charges, or encumbrances.

Step 6 – The scope of ownership

In addition to explaining what the investment will be used for, the letter should also tell the investor what percentage of the business they will own after the transaction is complete.

Step 7 – The need for financing

The letter should tell whether or not the investment needs to be financed by the investor. If it does, you should outline the details about how payment will be made.

Step 8 – Confidentiality of information about the investment

The next section should indicate that the investor and other approved third parties should have access to information about the investment. The letter should state that the investor has to keep the information private, unless the main owners give permission to reveal the information using the prior written notice.

Step 9 – Conditions of the transaction

An investor should be able to do thorough research (also called due diligence) and check into the company thoroughly. They should also be able to communicate with other important parties involved in the company.

Step 10 – Finalization of the deal

In this paragraph, the closing date should be mentioned, as well as who will be responsible for paying closing costs.

Step 11 – Confidentiality of the negotiations

The letter should also mention that the details of the potential investment should be kept confidential unless given permission by both parties or if required by law.

Step 12 – Expenses

Only the investor and main shareholders would be bearing their own expenses related to the LOI and the purchase and sale of shares.

Step 13 – The condition of creating a formal agreement (for binding LOIs only)

A binding investment letter of intent should include a time frame in which the formal agreement between the parties should be established.

Step 14 – Negotiations in good faith

The primary shareholders and investor agree to be diligent in their negotiations, and close the transaction within the specified timeframe.

Step 15 – Exclusive rights of the investor

The investment letter also includes a promise from the main shareholders not to talk with other potential investors unless there are existing agreements in place, which is an important element of the letter.

Step 16 – Shareholder’s obligation

The section regarding main shareholders’ agreement not to sell any of the investment to other third parties should be included in the letter.

Step 17 – Currency and governing law

Additionally, the letter should specify what currency the parties will use, as well as which law will apply.

Step 18 – Usage of electronic mediums

In this step, the letter should specify that sending the letter through electronic means (email, fax, etc.) is acceptable and that the recipient can print out the letter.

Step 19 – Validity of separate provisions

The letter should also state that if any part of the formal agreement is found to be untrue or invalid, then the rest such agreement will still be valid.

Step 20 – Method of accepting the letter

The last section of the letter should explain what happens when the letter is accepted. For example, signing and returning a copy of the letter back to the sender.

Step 21 – Date and signatures

The letter should include the date it should be completed by, as well as the signatures of both parties. Both the investor and main shareholders have to sign the letter.

What Should be Included in an Investment Letter of Intent?

These are the general terms that should be included in this letter of intent:

  1. An investment letter of intent should discuss the details of the investment, such as the amount being invested, the percentage of ownership given in return for the investment, and why the investment is being made.

  2. The letter should also state whether the investor will be able to obtain financing, which would make the letter conditional, or if they do not need to get financing, making the letter non-conditional.

  3. The letter should also include a confidentiality clause, as well as the terms of the investment. The amount of time the investor has to conduct due diligence might be included, as well as speaking with third parties.

  4. The letter should include details of the deal being kept private, and that the details might only be released with written permission.

  5. The parties should also agree in the letter that the deal closing date is either when the full investment is paid, or when ownership is granted to a portion of the investment.