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?
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
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.
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'?
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.