Big Red Car here in the ATX — 43F, light rain, ceiling at 300′ and no wind. Will be 64F before the day is over. Saturday will be high 70’s. No mention of snow.
So The Boss is talking to one of his brilliant CEOs and they were trying to figure out how the CEO would make an important change in the capital structure and ownership of his company. It had been bugging the CEO for months. Months. Finally, he brought it to The Boss and they chatted about it.
The Boss said: “Letter of intent.”
The CEO, who was brilliant about all things product but who was not terribly experienced in running companies and had never made such a dramatic change in his business before, said: “Huh?”
A letter of intent, as it seems to indicate, is the vehicle whereby a CEO can announce his intentions to the recipient. It is a good first step after introducing the subject. Most such negotiations are 5-7 step processes and the letter of intent is “touch” number two. In each of the steps, you will be jumping halfway to the lettuce.
In this specific instance, it would entail cleaning up the cap table and acquiring the interest of an investor whose interest in the business had changed but who owned such a substantial chunk of equity that the company could not effectively raise money. The magnitude of the equity was blocking the new money and would so dramatically dilute the other founders as to make it uninspiring to continue. Typical problem.
The letter of intent itself is just an exercise in who, what, when, where, why, how much. Here is a simple exemplar The Boss often gives to CEOs looking for a starting point.
In this instance, it was originally created for a proposed sale of a company which did, in fact, materialize. It’s been used for plenty that didn’t make it also.
Some practical thoughts on letters of intent.
1. Striking first — defining the terms of the discussion with a letter of intent — seems to lead to better outcomes. Like checking the inflation of the footballs before a game [cheap shot alert].
2. Remember always it is a negotiating technique. You don’t get what you deserve, you get what you negotiate. Negotiate.
3. The letter of intent provides great input to the lawyers to paper up the final deal with the caveat that the signatories to the letter of intent are the “business decision” deciders, not the lawyers. If the lawyers get wrapped in their scrivener underwear insist they come back to the business folk to make the business decisions.
4. Good letters of intent always result in lower legal fees.
5. Develop a good library of letters of intent for different purposes.
Letters of intent are called all kinds of things — term sheets, memoranda of understanding. In the end, they’re all letters of intent.
If you get stuck on something, call The Boss at 512-656-1383 or email [email protected]