Contract negotiation · Distribution Partnerships

Since LOIs aren't binding, can issuing companies be persuaded to put in terms that'd attract investors but might not make it to the Definitive Agreement?

Anonymous

April 27th, 2017

Prospect theory says investors are more likely to make decisions based on potential losses and potential gains more so than on likely outcome. If that's the case, shouldn't every LOI focus on the potential gains? What incentive does a company have to be conservative in a LOI?

Roger Royse Royse Law Firm

April 27th, 2017

Some states (like California) impose an obligation of good faith (even in a non binding LOI) so adding terms that you have no intention of honoring is risky

Jerry Prendergast Prendergast & Associates

April 27th, 2017

As was said CA is one of the states that require "good faith" in your LOI. As well as in your operating agreement. So if you make a lot of money for your investors they will not care. But if you lose them money you are in a lot of trouble. Now as to the need for an LOI - I do not understand why an investor w even encumber themselves with one. They are going to subscribe or not.

Anonymous

April 28th, 2017

Roger and Jerry, am I correct in assuming that an 'optimistic' LOI as described in the question would be fair game in many states besides California? What exactly constitutes 'good faith'?

Anonymous

April 28th, 2017

Delaware is more restrictive to diverge from the LOI than California (note that virtually all startups are recommended to incorporate in Delaware which would be the venue in case of controversy) as to diverging from the LOI. But having said that, anything can be negotiated, especially between the LOI and the final term sheet, etc. It all depends on the dollar amounts and the negotiating parties.