October 26, 2026
Start with what stockholders will actually receive, not the headline price. Subtract the company's debt, unpaid transaction expenses and any working capital shortfall to get the equity value, run that through your liquidation preferences and option exercise prices to see what each holder gets, and then discount the parts that are held back in escrow, paid in buyer stock or paid later as an earnout. The rest of the LOI tells you how likely the deal is to close and how much of the money you keep: closing conditions, escrow and indemnity limits, and what happens to your team.
Key takeaways
Most of an acquisition LOI is non-binding, but the exclusivity clause is binding, and once you sign it your leverage drops. Buyers rarely improve price terms after the LOI, and they often look for reasons to lower them in diligence. So the LOI is where the economics get set. Our page on Startup Acquisitions explains which LOI clauses bind you. This page explains how to read the numbers.
Most LOIs state a price on a "cash-free, debt-free" basis, which means the buyer pays the headline number for a company with no debt and no excess cash. Several things then move the number.
Debt such as venture loans, credit lines and unpaid notes is paid off out of the price. Unconverted SAFEs and convertible notes are handled under their own change-of-control terms.
Transaction expenses that are unpaid at closing, such as bankers', lawyers' and accountants' fees, a directors' and officers' insurance tail policy, and the employer payroll taxes on option cash-outs and bonuses, are usually deducted too.
The working capital adjustment compares the company's actual working capital at closing with an agreed target, often called the peg. A shortfall reduces the price dollar for dollar. Ask how the peg will be set before you sign, because a peg set too high quietly lowers the price.
Cash left in the company is often added back.
Option exercise prices matter when options are cashed out. Each option holder receives the deal price minus the exercise price, so the exercise prices stay in the pot for everyone.
Example. A buyer offers a $50,000,000 headline price, all cash, cash-free and debt-free. The company has 10,000,000 fully diluted shares: founders hold 5,000,000 shares of common stock, Series Seed investors hold 3,000,000 shares of preferred stock for which they paid $6,000,000 with a 1x non-participating preference, and employees hold 2,000,000 options with a $0.50 exercise price that will be cashed out. The company has $2,000,000 of venture debt, $1,500,000 of unpaid transaction expenses and a $500,000 working capital shortfall.
| Step | Amount |
|---|---|
| Headline price | $50,000,000 |
| Less debt, expenses and working capital | ($4,000,000) |
| Equity value | $46,000,000 |
| Plus option exercise prices | $1,000,000 |
| Value per share ($47,000,000 ÷ 10,000,000) | $4.70 |
| Preferred (converts, since $4.70 beats its $2.00 preference) | $14,100,000 |
| Founders (5,000,000 × $4.70) | $23,500,000 |
| Option holders (2,000,000 × $4.20) | $8,400,000 |
If 10% of the headline price, $5,000,000, is held in escrow and everyone shares it pro rata, about $2,550,000 of the founders' share is held back. The founders receive roughly $20,950,000 at closing, not the $25,000,000 that "half of $50 million" suggests, before taxes.
Now take the same company at a $15,000,000 headline price. Equity value falls to $11,000,000, and the preferred takes its $6,000,000 preference because converting would be worth only $3,600,000. The remaining $5,000,000 goes to the common and the options, and the founders receive about $4,290,000. They own half the company on a fully diluted basis but get about 39% of the equity value. See Liquidation Preference.
Ask the buyer or your own advisors for a spreadsheet like this, often called a funds flow or payout waterfall, before you sign, and update it every time a term changes.
Cash at closing is the most certain value. If part of the price is buyer stock, ask how it is valued. A fixed number of shares moves with the buyer's price, and a fixed dollar value needs an agreed formula, often an average price over a period before closing. If the buyer is private, its stock is illiquid, and the common stock you'd receive is worth less than its latest preferred price. Ask whether the shares will be freely tradable, whether there is a lock-up, and how the buyer will issue stock to any of your stockholders who aren't accredited investors, which may mean paying them in cash instead. Stock deals can sometimes be structured so that tax is deferred, which is a question for a tax advisor.
The LOI should say whether options will be assumed by the buyer or cashed out, and whether unvested options count toward the headline price. Buyers sometimes include the value of assumed unvested options in the headline even though employees only receive it if they stay, which overstates what stockholders get. Ask whether any retention pool for employees comes out of the price or is paid on top of it. See What Happens to Stock Options When a Startup Is Acquired?
Expect the buyer to ask founders and key employees to accept new vesting on part of their proceeds or on new grants, and to ask selling founders for a non-compete. Non-competes given by owners selling their business are treated differently from employee non-competes and are generally enforceable, including in California. Negotiate the scope and length. See Single Trigger vs Double Trigger Acceleration.
The buyer will want part of the price held back to cover breaches of your representations about the company. Market data from SRS Acquiom's 2026 study, covering deals closed in 2025, put the median indemnity escrow at 10% of transaction value without representations and warranties insurance and 0.5% with it. General representations commonly survive about 12 months. A working capital escrow is often separate.
Ask whether the escrow is the buyer's only recourse or whether sellers can owe more, up to the full price, for certain claims. Fraud and a short list of "fundamental" representations, such as capitalization and authority, are usually carved out. Ask also whether option holders share in the escrow.
An earnout pays more if the business hits targets after closing. Define the metric precisely, agree on how the buyer must run the business, and value an earnout at a steep discount, because many are never paid in full.
Read the closing conditions as a list of ways the buyer can walk away. Push back on a financing contingency or an open-ended diligence condition. Identify which customer and vendor contracts need consent on a change of control, how many key employees must accept offers, and whether stockholder approval is secured through a drag-along. Large deals may need antitrust clearance. The Hart-Scott-Rodino filing threshold for 2026 is $133.9 million for deals closing on or after February 17, 2026. A foreign buyer may also raise national security review questions. Keep the exclusivity period short.
Once you sign the no-shop, time works for the buyer. You can't talk to other buyers, the buyer is learning your weak spots in diligence, and every week costs you runway and your team's attention. Exclusivity commonly runs 30 to 60 days, and when it ends without a signed deal the buyer usually asks for a short extension, which is hard to refuse if no other buyer is waiting.
So settle in the LOI the issues you won't win back later. Whatever the LOI leaves vague, such as indemnity beyond the escrow, how working capital is measured, or what founders and key employees must sign, is usually settled in the buyer's favor in the definitive agreement, so name those terms in the LOI, even briefly. That includes whether founders must accept offers, re-vest part of their proceeds or roll equity into the buyer, and how much of the price depends on it.
Then write process discipline into the LOI: a target signing date, a date for the buyer's first draft of the merger agreement, a weekly deal call, and exclusivity that ends automatically if the buyer lowers the price. Agree to extensions only against milestones, such as the first draft delivered or diligence substantially complete, and keep a runway plan and other buyers warm so an extension is your choice. For the next step, see What Happens Between the LOI and Closing When I Sell My Startup?
Golden parachute rules. Under Section 280G, if sale-related payments to an officer, a large stockholder who works for the company or another highly paid service provider equal three times or more of their average annual pay over the prior five years, the amount above one times that average faces a 20% excise tax and the company loses its deduction. A private company can usually avoid this with approval from more than 75% of the disinterested stockholders after full disclosure, once the affected people waive the payments they'd otherwise receive. Founders who paid themselves little for years have a low five-year average, so accelerated vesting, retention bonuses or a carve-out can cross the threshold even in a modest deal. The vote takes planning, because the waivers and the disclosure to every stockholder entitled to vote have to come before the vote, and the vote has to happen before closing, so put it on your list before you sign, not on the closing checklist.
Structure and QSBS. Asset sale, stock sale or merger, cash or stock, and taxable or tax-deferred all change what each holder keeps after taxes and whether QSBS benefits survive. Have a tax advisor model the offer before you agree to a structure.
For more, see Founder Guide: Selling Your Startup, Startup Due Diligence, Drag Along Rights, What Do Stockholders in My Startup Need to Approve? and Fiduciary Duties of Startup Founders.
If you've received an acquisition offer, contact us before you sign the LOI.
