Approach, LOI, diligence, negotiation, close. The exclusivity clause is where founders lose their leverage.
12 min read · Level 5
Signing the LOI is the moment your leverage disappears — most of the document is non-binding but exclusivity is real, and it stops you talking to anyone else for a month or two. Everything material must be negotiated before that signature, because afterwards your only remaining option is to walk away with nothing and restart a process everyone will hear about.
The sequence:
Approach → Initial conversations → Indicative offer → LOI (letter of intent) → Exclusivity begins → Due diligence → Negotiation → Definitive agreements → Close
Three to nine months. The LOI is the pivotal moment.
Because the exclusivity clause in the LOI is binding, even though most of the document is not. Signing it typically stops you talking to any other buyer for 30–90 days.
At that moment your leverage disappears. Any competitive tension you had is gone, and the buyer knows it. Price reductions during diligence — 're-trades' — are far more common after exclusivity than before.
This is educational information, not legal advice. Rules differ by country and change — get advice from a qualified professional in your jurisdiction before acting.
Sources: NVCA — model legal documents
How leverage actually works:
Before the LOI you may have several interested parties. That tension is your entire negotiating position, and it is worth a great deal.
After signing you are contractually alone with one buyer for 60 days. If diligence surfaces something, or the buyer simply reconsiders, they can reduce the price and your alternative is to walk away with nothing and restart a process everyone will hear about.
So the rule is: negotiate everything material BEFORE signing the LOI. Price, structure, earnout terms, what happens to the team, founder commitments after close. Once exclusivity starts, your position only weakens.
On structure — the headline number is not the number. A '$30M acquisition' might be $18M cash at close plus $12M of earnout contingent on targets over two years. Earnouts frequently pay out below expectation, because after the acquisition you no longer control the resources needed to hit them.
Ask directly: how much is cash at close, how much is stock, how much is contingent, and on what exactly?
First-time founders often sign an LOI quickly because it feels like the deal is happening. It is the single point at which you had the most leverage and gave it away.
The second mistake: focusing on the headline number rather than the structure. Cash at close is the only part that is certain.
The third: not preparing a data room in advance. Diligence on an acquisition is more intensive than on a funding round, and being disorganised during exclusivity gives the buyer reasons to re-trade.
Even to an informal approach. Early conversations set anchors that are hard to move later.
More than one interested party is worth more than any negotiating technique.
Price, structure, earnout, team, your own commitments. After exclusivity you have no leverage left.
Then stock, then contingent. The headline number is usually the least certain part.
Diligence is intensive. Disorganisation during exclusivity invites a price reduction.
After preferences, after tax, and with realistic assumptions about the earnout.
The moment any acquisition conversation becomes concrete.
Do not run a sale process to test your valuation. It is disruptive, it becomes known, and a failed process makes the company harder to sell later.
Price reductions during diligence are far more common after an LOI is signed than before, for structural reasons: the buyer knows you have no alternative and that restarting is costly and visible. It is not necessarily bad faith; it is what the incentives produce.
Settle price, structure, earnout terms and what happens to the team before signing. After exclusivity begins you are negotiating from one side only.
A widely reported acquisition figure frequently includes stock and earnout contingent on targets over several years — and earnouts routinely underpay, because after the acquisition you no longer control the resources needed to hit them.
Ask what is cash at close, what is stock, and what is contingent on what. Cash at close is the only certain part.
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