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.