I work for a small startup. The startup is financially on the rocks. We are currently negotiating a big deal with a big company. If we get the deal, we can hobble on. If we don’t, we close shop.
Our CEO is feeding us a lot of optimistic misdirection which he feels is “real news” about the progress of the deal. From what I can gather, we have a “letter of intent” from the big company signed. I also know that:
Our guy who was negotiating the deal quit
Their guy who was negotiating the deal has been replaced
The letter of intent was not the same as the “official legal” agreement
The big company hasn’t approved anything financial yet
Judging from what you know of business between American companies, what do you think is the likelihood that the deal will actually go through? Are letters of intent as a good as a binding deal, or are they just a smokescreen?
Depends upon the terms of the LOI. Most LOI’s are binding, but provide enough outs for various conditions (market changes, items discovered during due diligence, financing, etc.) that if either party wanted to walk away, they could probably find a legitimate legal out.
Letters of Intent can be binding, and that’s the problem.
They are useful if actual damages arise. For instance, if you purchase future supplies based on said LoI. Of course you’d probably wind up in court, but the judge would be more apt to side with you on a LoI if you could show due to that letter, you were hurt.
But if you have a LoI and no damage was done, in terms of money, you’d be pressed to get it enforced.
Ironically it’s HARDER to write a legally enforceable LoI than it is to write an actual contract, so you need a lawyer even moreso.
The classic example is Newport Ltd vs Sears. The Fifth Circuit court ruled for Newport. The court rulee that “where the parties’ minds have met upon all essentials, a contract is created between them and binds them.”
So even though there was only a LoI, it was infact a contract.
Markxxx has given the legal position. My experience from being in the same position as your company is that we have wanted a LoI befor committing to what would be serious expense for a company our size, but when the bbig-company-customer lawyers get involved they produce a LoI that has so many get-out clauses that it is legally worthless as a commitment.
So I take the LoI to mean that there is commitment at the management level, but everything could get derailed during the contract process or even when getting VP-level approval at the customer.
In commercial real estate almost all LOI’s are simply (effectively) position papers and are legally worth the paper they are printed on, and are explicitly non-binding. The actual lease or sales contract constructed around the LOI specifications are the real binding documents once executed.
To really understand how binding the LOI is in this case would require a review of its terms, preferably by someone (a lawyer or businessperson) who is experienced in negotiating letters of intent. It’s certainly not nothing: The comanies wouldn’t have signed the LOI unless they had some expectation that the deal would go through. But two of the factors you mention, that their negotiator has been replaced and the big company hasn’t approved anything financial yet, would give me concern.
As others have pointed out, an LOI may or may not be binding. My current company does not use LOIs in the sales processes. A former company I worked for did use them and essentially it was an agreement that we were the selected vendor and would be moving forward with contract negotiations. They also typically outlined an initial fee to be paid to begin implementation services that was fixed for a set period of time (30-60 days) so the client could not back-burner the completion of the actual contract.
Having worked in sales for technology companies, my personal opinion on how you should pereceive the LOI and “sunshine” from the CEO is to keep in mind anything, and I mean anything, can happen at any time until the contract is signed - and sometimes even afterwards - that results in everything going to hell and the deal not getting completed.
Given that even this “big” deal will only allow the company to limp on… on partial salaries… for less than a year, I’m certainly down with things going south. At least the decision to leave this position would be made for me!
No, it’s in no position at all to pursue anything except selling off the furniture.
The CEO has called an all-hands meeting for this afternoon. He doesn’t do that unless something is going to Happen–in the last year it’s happened three times, once for layoffs, once for pay cuts, and once because he had to give a speech before the summer party.
Either the deal has collapsed, or it’s gone through for less money than we hoped for and he will announce what’s going to Happen about that. Stay tuned, boys and girls!
CEO says the deal is almost certainly going through (which means what precisely…?). The meeting was to break it to us that our full salaries aren’t going to be restored any time in the foreseeable future.