Why Founders Should Take LOIs and MOUs More Seriously

The document may be called “non-binding”, but that does not mean nothing is binding

Many founders treat Letters of Intent and Memorandums of Understanding as harmless paperwork.

That is understandable.

They often appear early in a relationship, before a full commercial agreement, investment agreement or strategic partnership document is negotiated. The tone is usually positive. The parties want to move forward. Nobody wants to slow things down too early with heavy legal drafting.

A typical founder assumption is:

“It is only an LOI. Nothing is binding yet.”

Sometimes that is true.

But not always.

An LOI or MOU can be entirely non-binding. It can also be partly binding. In some cases, depending on the wording and conduct of the parties, it may create more legal and commercial commitment than the founders originally intended.

The key point is simple:

The title of the document does not decide its legal effect. The content does.

For startups, this matters because LOIs and MOUs are often signed at exactly the moment when the company is trying to win a customer, partner, investor or strategic opportunity. That is also the moment when founders may be most willing to accept vague or one-sided language.

And vague language at the beginning of a relationship can become expensive later.

What is a Letter of Intent?

A Letter of Intent, often called an LOI, is a document that outlines the parties’ intention to pursue a transaction or cooperation.

It may be used in many situations, for example:

• a potential commercial partnership
• a pilot project
• a customer relationship
• a strategic cooperation
• an acquisition discussion
• an investment round
• a licensing arrangement

The purpose is usually to record the main commercial understanding before the final long-form agreement is negotiated.

In a startup context, an LOI can be useful.

It can help align expectations on:

• commercial objectives
• timelines
• exclusivity
• next steps
• responsibilities during negotiations
• confidentiality
• key deal terms

Used well, an LOI brings structure.

Used poorly, it creates uncertainty.

What is an MOU?

Memorandum of Understanding, or MOU, is similar to an LOI.

It is often used in cooperation arrangements, public-private projects, university collaborations, research initiatives and early-stage partnership discussions.

The label “MOU” may sound softer than “agreement”.

But that does not make it legally irrelevant.

MOU can include binding obligations if the wording indicates that the parties intended certain provisions to be binding.

Again, the label is not decisive.

The content is.

The main mistake: assuming everything is non-binding

The most common founder mistake is treating the entire LOI or MOU as non-binding simply because the document says “Letter of Intent” or “Memorandum of Understanding” at the top.

In reality, these documents often contain a mixture of:

Non-binding provisions

For example:

• planned commercial cooperation
• indicative pricing
• future transaction structure
• target timelines
• intention to negotiate

Binding provisions

For example:

• confidentiality
• exclusivity
• non-solicitation
• cost allocation
• governing law
• dispute resolution
• restrictions on contacting customers or employees
• obligations to negotiate in good faith

This is not necessarily a problem.

In many cases, that is exactly how the document should work.

The problem arises when founders do not understand which parts are binding and which parts are not.

“Non-binding” does not always mean what founders think

A well-drafted LOI often says something like:

“This Letter of Intent is non-binding, except for Sections 5 (Confidentiality), 6 (Exclusivity), 8 (Costs), 10 (Governing Law) and 11 (Dispute Resolution), which are legally binding.”

That kind of structure is useful.

It tells everyone where they stand.

A poorly drafted LOI may say generally that it is “non-binding”, but still include language that sounds like a commitment.

For example:

“The parties shall proceed with the pilot project during Q3.”

Or:

“The company shall reserve sufficient resources for the implementation.”

Or:

“The parties agree to negotiate exclusively for a period of six months.”

Now the situation becomes more complicated.

Is this merely an intention?

Or is it a commitment?

That question may later become very relevant if the relationship breaks down.

Exclusivity deserves special attention

Exclusivity is one of the most important clauses founders tend to underestimate.

A potential customer or strategic partner may ask for exclusivity during negotiations.

That may sound reasonable.

But exclusivity can significantly limit a startup’s options.

For example, exclusivity may prevent the startup from:

• negotiating with other customers
• approaching other partners
• entering similar pilots
• raising interest from competing strategic players
• commercialising the same solution in a parallel channel

Sometimes exclusivity is justified.

But founders should ask:

• How long does it last?
• What exactly is exclusive?
• Which territory does it cover?
• Which products or services are included?
• Is there a clear commercial commitment in return?
• What happens if the counterparty does not proceed?

A broad exclusivity clause without clear obligations from the other side can be highly problematic.

For an early-stage company, six months of unnecessary exclusivity can be a long time.

LOI, MOU or pilot agreement?

Another common issue is using the wrong document for the wrong phase.

An LOI or MOU may be suitable when the parties are still discussing future cooperation.

But once the relationship moves into actual testing, access, integration or operational use, the parties may need something more concrete.

This is especially relevant for software, SaaS, AI and health-tech startups.

If the customer receives:

• demo access
• API access
• technical documentation for implementation
• sample data
• integration support
• or the ability to test the product in a real environment

then the relationship may already be moving beyond an LOI or MOU.

At that point, founders should consider whether a pilot agreement, evaluation agreement or limited commercial agreement is needed.

The question is not just:

“Are we still negotiating?”

The better question is:

“Has the other party already started using, testing or relying on our solution?”

If the answer is yes, the legal structure should reflect that.

Pilot projects are not automatically low-risk

Many founders see pilot projects as informal and low-risk.

That is not always true.

A pilot can involve:

• access to software
• customer data
• product testing
• integrations
• operational expectations
• feedback and improvements
• security obligations
• liability exposure

The fact that the project is called a pilot does not remove risk.

In some cases, a pilot is a compressed version of the future commercial relationship.

That means the pilot agreement should address at least the basics:

• scope
• duration
• permitted use
• IP ownership
• rights to feedback and improvements
• data protection
• liability
• termination
• no obligation to continue

Without these, a small pilot can create large uncertainty.

IP ownership and feedback

LOIs, MOUs and pilot documents often include language about development, feedback or improvements.

Founders should be very careful here.

A customer may request broad rights to:

• results
• improvements
• modifications
• feedback
• jointly developed materials
• or pilot outputs

This can be commercially sensitive.

A startup should generally protect its background technology and ensure that any license granted to the customer is limited to the agreed purpose.

A simple principle is:

Keep ownership of your core technology. Grant only the rights the counterparty actually needs.

In practical terms, this means clearly separating:

Background IP

The technology, software, know-how, models, documentation and tools the startup already owns or develops independently.

Foreground results

New outputs or materials created specifically during the cooperation.

Feedback and suggestions

Ideas or comments provided by the customer during testing or evaluation.

These categories should not be mixed casually.

If they are, investors may later ask uncomfortable questions during due diligence.

Data responsibilities

For health-tech, SaaS and AI companies, data is often where informal arrangements become risky.

An LOI may start as a business discussion.

A pilot may then involve actual data.

Once personal data or customer datasets are involved, the parties must address questions such as:

• who is the controller?
• who is the processor?
• is a data processing agreement required?
• is data transferred outside the EEA?
• are subcontractors involved?
• what security measures apply?
• what happens in case of a breach?

These questions are not cosmetic.

They affect legal compliance, customer trust, operational risk and investor confidence.

A simple NDA or LOI will rarely be enough once real data begins to move.

What founders should check before signing an LOI or MOU

Before signing an LOI or MOU, founders should ask at least the following questions.

1. Which provisions are binding?

Do not assume.

The document should clearly identify which sections are binding and which are not.

2. Is there exclusivity?

If yes, define it narrowly.

Avoid broad, long and unpaid exclusivity unless there is a strong commercial reason.

3. Are we committing to timelines or deliverables?

If timelines are only indicative, say so.

If deliverables are binding, define them clearly.

4. Are we already granting access?

If yes, an LOI or MOU may not be enough.

Consider pilot or evaluation terms.

5. What happens to IP and feedback?

Protect background IP.

Define rights to improvements and feedback.

6. Is data involved?

If data is involved, map the roles, responsibilities and transfer mechanisms early.

7. What happens if the deal does not proceed?

This is often overlooked.

If negotiations fail, can both sides walk away cleanly?

Are there continuing obligations?

Are there cost consequences?

Final thought

LOIs and MOUs are not the problem.

Unclear expectations are.

Used properly, these documents can help founders structure negotiations, create momentum and align the parties before heavier agreements are drafted.

Used carelessly, they can create hidden commitments, unnecessary exclusivity and unclear obligations before the startup fully understands the commercial consequences.

The founder takeaway is simple:

Do not ask whether the document is called an LOI, MOU or agreement.

Ask:

What does it actually commit us to?

Because in startup contracting, the risk rarely sits in the title.

It sits in the commitments.

Senior Associate Marko Moilanen,

email: [email protected]

tel: +358 40 517 0002

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