Letter of intent(LOI)- Shortcut to startup success
To build our startup successfully, we need to understand the needs of our customers and what they find valuable. We might be working on our MVP ”Minimum Viable Product”, and are wondering whether customers will want our product. For example, we may not be able to build our product for months or years - how do we get our customer’s opinion of the product? At the same time, to make investors satisfied with our product, we will need to convince them that the clients are interested in the purchase.
The client would like to see an agreement that commits him/her to purchase the product only if it works, without binding legal terms. Investors would also look for a similar agreement without any legal obligations.
This need for a non-binding agreement is called an LOI “letter of intent”.
It's fairly common for B2B companies (even B2C) to use a Letter of Intent (LOI) to show how exciting prospects are for their product. Typically LOIs outline the general terms that a Startup needs before they start making their real product, and this allows them to prove how well-researched their idea is.
In this article, I will list LOI as one of the most important options for startups to go faster. We’ll discuss the benefits of this method, and how it could help get feedback from customers early on even without product development. It serves best as documented proof to investors and lenders that we have a bonafide customer.
What Is a Letter of Intent(LOI)?
In most major business transactions, a Letter Of Intent (LOI) outlines the terms of a deal and serves as an “agreement to agree” between two parties. An LOI can be beneficial because it includes all the important points and is flexible.
It’s a way for us to make a soft commitment to potential customers’ use of our product in the future. We may need a soft commitment before the customer commits to purchasing our product. We hope that they will send us their feedback and share their experience with others.
The Letter of Intent is not legally binding since it’s just the initial proposal between businesses to discuss terms. The Letter of Intent (LOI) is a non-binding agreement that usually has a time limit. The LOI will expire if the parties have not created a good faith agreement in the time frame required.
What Is the Purpose of Letter of Intent( LOI)?
The MVP(Minimum Viable Product) in itself does not give us an accurate idea of consumers' interest in the product. After the MVP, the goal is usually to test the product in the market and at the same time, prove to our potential investors that there will be demand for it. Investors have to be convinced about our commitment to buying the product. On the other hand, the client needs to be sure by looking into the startup materials before he legally binds himself to purchase something.
Then startups can use letters of intent( LoI) as a way to show that people want their idea by getting customers on board without any legal arrangement. The purpose of a Letter of Intent (LOI) is to help secure initial customers and build traction. It demonstrates we are moving towards product-market fit, as it means we have a good understanding of our customer’s needs in order to create a robust product that fulfills their needs and wants.
How Letter of Intent(LOI) can help startup funding?
Startups are always trying to justify the valuation of their business when it comes to funding. The truth is that most startups fail to recognize the golden opportunity they have in front of them. The investor has to be provided with detailed projections of projected sales before he begins funding the project. Therefore, for startups to obtain adequate funding from investors, this letter can help them in two steps.
1: Acquiring customers' approval to purchase without any legal obligation
2: Present investors with a written agreement( Letter of intent) to install their trust with a written agreement that details the specifics of our business such as type, price and profit factors, contact details so on.
Who should startups get letters of intent(LOI) from?
Startups can acquire letters of intent from many different resources, for example:
Letter of intent (LOI) from investors:
It's typical for a non-binding letter of intent to take the form of a document that gives a rough outline of what parties to an agreement commit to. This can be used by entrepreneurs as well as potential investors, allowing them to see the level of commitment on both sides.
Startups might need to reach a certain milestone (e.g., patent approval) to get the potential investment. Similar to a term sheet, a letter of intent assures other investors that our startup is valued at that particular pre-determined valuation. These will often be something we can negotiate with them.
Request for free samples:
Letter of intent( LOI) from clients:
A letter of intent is a document that informs buyers about the basics of the product, signing up for updates, and expressing interest in future iterations. A letter of intent can be used to get feedback on an MVP.
Letter of Intent( LOI)- 6success
A lot of startups use the LOI at the early stages to get an idea of what the valuation for their product will be. Convincing a new customer to sign a contract for our incomplete product is not an easy process. But LOI doesn’t require the approval of the legal department since it’s a non-binding contract that doesn't represent any formal commitment. A letter of intent is a formal document used to determine the quality of products or services to be sold. It also specifies details such as the approval of certain tests and tractions. It should be noted that this document is issued in writing because verbal feedback can be misleading.
A letter of intent is usually suitable for B2B clients. Where the number of clients is small. Businesses as Potential clients might want to see test results, patent approvals, and so on before putting in an official purchase order. They can reduce the risk by using a letter of intent.
LOI ”letter of intent” is a primary commitment from the client that could be converted into a contract later on.
The goals of LOI from clients are:
Better understand our business model and products.
Get feedback on our product
Get a formal agreement from the client
Convince investors that our product-market fit checks out
Having a collection of these letters will be a great testimonial from potential customers! investors will likely call these customers.
Samples( Link to 6success community)
Eric Ries author of Lean Startup has prepared a very interesting case study, which its review is recommended.
Request for free samples:
Letter of intent( LOI) from partners:
As a startup entrepreneur, you need to know how to evaluate an LOI for your business acquisitions. The letter of intent is often one of the first pieces of documentation in any merger and acquisition ( M&A) transaction.
Some points in Letter of Intent Preparation
Legal Advice
It is up to the individual if they want to or have the funds to use an attorney to put an LOI together, but because the document is not legally binding, many entrepreneurs draft these emails themselves.
Length
Your letter should not be longer than 1-2 pages. Anything longer becomes too complicated and would need to go through more reviews by the customer.
Conclusion
In order to close a deal, it is essential that you get 4-6 signed letters from the contract (or as many as you can). Getting these letters quickly can help bolster your argument on how long and the cost of each sales cycle.
