Require 10% of the deal in escrow after the first 2 weeks in the discovery phase. If the deal doesn't go through, the amount in escrow defaults to you. If they jerk you around on the escrow, cut them loose, they're not actually interested in acquisition
Great point. This is what happens in a real estate. A letter of intent should have earnest money deposited into an escrow (because the offer is being made in "earnest") and each contingency should have an expiration date. Upon expiration of the due diligence contingency, for example, the earnest money deposit becomes non-refundable and credited towards the purchase price. If the buyer defaults after the due diligence contingency then the earnest money goes to the seller.
Does anyone have a link to a sample LOI for selling startups or M&A in general?
I've handled a decent volume of small tech startup m&a and I've never seen an escrow. Better advice is for the sellers to spend a decent amount of time in person with the buyers. Get to know who you are dealing with. It's a lot easier for a buyer to mislead (intentionally or otherwise) via email as opposed to in person lunches and dinners.
Actually the opposite. If chips represent time, I'm advising that the seller force the buyer to spend time (in person) with them to reflect commitment. A classic example is whether or not the seller can get a meeting with the buyer's CEO (depending on the relative sizes of the two companies, it could be a lower level exec too). A CEO will not waste his or her time on a dozen meetings with a dozen different companies to support an m&a fishing expedition. But if the list is narrowed down to just 1 candidate, and certainly if the deal is progressing, then the CEO (or other C level exec) is usually eager to meet with the seller's management team.
This still requires the selling side to guess the buying side's time commitments/availability and intentions. The escrow cuts through all the bullshit.
Clearly we will disagree with eachother here; but I am truly at a loss for how a 1 hour lunch is commensurate with a month+ of discovery effort.
This is how I approach any serious business deals – put up or shut up. Either you agree to this kind of deal or you pull out. Either one is fine, but make it clear.
