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Conversations with business leaders and changemakers on how they built their business and what keeps them going.
Pankaj (00:16)
Ladies and gentlemen, welcome back to another exciting episode of Letters of Intent. I am your co host, Pankaj Raval, and I'm joined by my trusted colleague and co-host Sahil Chaudry. Sahil, how are you today?
Sahil (00:26)
I'm doing great. And today we're gonna talk about my favorite topic, Letters of Intent.
Pankaj (00:31)
Yes, we're talking about the namesake of this podcast. The reason we named it Letters of Intent is because these documents are so important in establishing the groundwork for any transaction, whether you're gonna be licensing, asset sales, stock sale, whether you're entering into an employment relationship, you want to set out the terms early on to make sure everyone's on the same page. And that's what this Letters of Intent can do. It can make or break a deal. It is critical, and it's crazy how often we see these signed before they get to us. Sahil,
we're gonna jump into it today. Tell us, when looking at a Letters of Intent, what are the main issues or areas that you're looking at?
Sahil (01:03)
Well, so as deal attorneys at Carbon Law Group, we have a protocol here. We look at eight sections primarily before we dive even deeper into a Letter
of Intent. And those eight things are the purchase price, how much is cash at closing, what's actually being sold, and who are the buyer and seller, what you're agreeing to do after closing, the diligence period, the exclusivity period.
confidentiality and whether the Letters of Intent is binding or non-binding.
And Pankaj, I don't have to tell you that we see many clients sign Letters of Intent that have terms that we wish they didn't agree to. And so, I know we have a really exciting offering as well as we're going through these
Eight sections, we also want to let you know that we have a special offering, a new product from Carbon Law Group that's gonna help you evaluate these Letters of Intent.
Pankaj (01:56)
Yeah, and those lucky listeners out there, if you tuned in to today's episode, you're gonna get this free as a download. it's gonna be in the show notes. So please look out for the link. It's a really valuable MD file that you can use as a skill to actually upload to Claude or ChatGPT or Perplexity or whatever, or Gemini, and use that to actually triage your LOI. Does it have the terms that we're discussing? Are they clear?
Are there issues? It flags all those issues and then it suggests questions to ask us as your lawyers once you return counsel. And just a word of caution for everyone who's using AI to analyze these things, it's always important to have an expert review these LOIs as well. I think AI is a great tool if you know how to use it, but also it shouldn't be the only thing you rely on to ensure that you're doing the right thing because it is trained on a lot of
data and not always the best data and we want to make sure everyone's protected so that's where we can come in and help ensure that we're asking the right questions, thinking outside the box, asking it so maybe questions that you didn't provide as prompts. So you're covering all your bases, and we're always here to help.
Sahil (02:57)
For everyone listening, you're gonna basically have me and Pankaj on your desktop just with a little bit less charisma.
Pankaj (03:04)
Yes.
Sahil (03:04)
and in the meantime, we want to show you how we like to think about these Letters of Intent. So Pankaj, let's do this lightning round style. I'm gonna
Pankaj (03:11)
All right, let's do it.
Sahil (03:12)
list off the section that we're looking for and let's try to find that in this Letters of Intent and see if it's well drafted.
Pankaj (03:20)
we'll do a control F. You tell me where to go and I'll go there and we'll
Sahil (03:21)
Let's control F it.
Pankaj (03:22)
control F it. Yes. Control F it.
Sahil (03:24)
Control F it. Okay, so number one,
what is the purchase price?
Pankaj (03:31)
Purchase. Let's see. Where's the purchase? All right. We see purchase price here. Purchase price. All right. Price we see. All right. Purchase price of the exclusivity agreement is $250,000 plus $50,000 for exclusive rights for Venezuela, which price includes 1,000,000 shares of common stock of Medstrong International Corporation, payable $100,000 in 30 days after the execution of Letters of Intent and $150,000 90 days thereafter, or $200,000 with Venezuela.
territory.
Sahil (03:58)
That takes us to question number two, which is what
Pankaj (04:01)
Okay.
Sahil (04:02)
we like to call in Hindi Rokri, which is cash. How much cash
Pankaj (04:04)
Okay. Okay. Gash.
Sahil (04:07)
is that closing?
Pankaj (04:09)
So cash does not show up. There's no mention of cash here, but let's say closing. No closing either in this one. Interesting.
So what do we make of that, Sahil?
Sahil (04:17)
So okay, we have a purchase price, but we don't have a cash component. It looks like what we've got is stock
Pankaj (04:24)
it's money though too, right? It says purchase agreement exclusivity agreement is two hundred and fifty thousand dollars plus fifty thousand dollars for exclusive rights in Venezuela.
Sahil (04:31)
That's correct. Right.
Pankaj (04:32)
So but then there's also
Sahil (04:33)
That price
and that price gets you it includes one million shares of common stock of Medstrong International Corporation.
Pankaj (04:40)
Right.
Sahil (04:41)
Okay, which is payable. And then we have thirty days after the execution, one hundred thousand dollars, thirty days after the execution of the Letters of Intent, and one hundred and fifty thousand dollars ninety days thereafter or two hundred thousand dollars with Venezuela territory. I'm seeing a red flag here, Pankaj, which is thirty days after the execution of this Letters of Intent, we don't have a proper purchase agreement yet. And if this is an exclusivity agreement, that means there are services associated with this.
There's some kind of license associated with this. None of those terms have been fleshed out. There's a lot of
Pankaj (05:13)
Yeah.
Sahil (05:14)
room for disagreement here.
Pankaj (05:15)
Yeah, yeah, absolutely. And just so everyone knows, like this is also somewhat unique or non standard Letter of Intent because we were seeing at the top here that they're also conflating a Letter of Intent with a formal agreement. It says this letter serves as a formal agreement and Letter of Intent. So what does that mean? Like, formal agreement and Letters of Intent. Generally you have one or the other, like you have a Letter of Intent that is a
letter that shows that you here's the intention of the parties to do a deal together. Here are the base, here are the terms, here are some binding terms and here are non-binding terms. And then that goes to a formal agreement. So they're trying to, do it all in once and there's a lot of problems with that. There's a lot of risks and it could create a lot of problems down the line if there's a dispute. So this is something we're gonna definitely flag and let you guys know to not do this because we see a lot of problems arising when you're trying to combine these agreements.
if you're gonna do a full agreement, do a full proper agreement. If you're not, make sure the Letters of Intent is really clear and clarifies what is binding and non binding.
Sahil (06:09)
And then we've got question three. Who are the parties and what's being sold?
Pankaj (06:15)
Yeah. So here's the parties. Where are the parties? it's a defined term, parties. And so they're saying
Okay, so the parties are Medstrong International Corporation hereafter Medstrong and JVF International Solutions here and after JVF. so the purpose of this letter of intent is to summarize the agreement between the parties and we'll have the effect of formal agreement. So these are the parties.
Sahil (06:34)
Okay, and who is the buyer and who's the seller here?
Pankaj (06:38)
Yes, it's a good question. so the buyers
Sahil (06:39)
It looks like it's baked into the objective.
Pankaj (06:41)
Yes, yeah. So to grant JVF exclusive rights to fully develop market and sell Medstrong's patient data quickly, PDQ medical record online programs and described main territory and non exclusive on the additional territory.
Sahil (06:56)
So a little ambiguous, but what it's meant to say is Medstrong is granting to JVF the exclusive rights. So Medstrong
Pankaj (07:03)
Right. Exactly.
Sahil (07:05)
is paying JVF, and JVF has a job to do here
to fully develop market.
Pankaj (07:09)
Wait, is Medstrong
is Medstrong paying JVF? If JVF is getting the exclusive rights, isn't JVF paying for the exclusive rights?
Sahil (07:17)
JVF is paying for the exclusive rights and Medstrong is granting the exclusive rights.
Pankaj (07:22)
Right, so Medstrong selling.
Sahil (07:24)
Medstrong is selling.
Pankaj (07:25)
And JVF is buying.
Sahil (07:26)
Yeah.
Pankaj (07:26)
Right?
Sahil (07:27)
JVF is buying, yes, that's right, because JVF is getting the exclusive rights.
Pankaj (07:31)
Right. Right. So that's important to note here and really be clear about, right? So you have an objective but it's really important to spell it out who's getting what and in exchange for what.
Sahil (07:39)
So Medstrong
is selling exclusive rights in exchange for that mix of cash and common stock that we discussed in exchange
Pankaj (07:48)
Yes, exactly.
Sahil (07:49)
for
Pankaj (07:50)
Yeah, so purchase price of the exclusivity agreement is two and fifty thousand dollars. So JVF is paying Medstrong two hundred and fifty thousand dollars plus fifty thousand dollars exclusive rights of Venezuela, which includes a million shares of common stock of Medstrong International Corporation.
Sahil (08:04)
So that means Medstrong,
is paying JVF because JVF is doing a job here. So Medstrong is offering money and stock for JVF to perform this job. And JVF gets as part of that function the exclusive rights to develop, market, and sell. So basically, what I'm seeing here is
Medstrong, it's kind of like a sales, you know, we see this in fashion, like someone who's a sales associate. So actually,
Pankaj (08:32)
Mm-hmm.
Sahil (08:33)
the company or the brand is going to pay the sales rep to develop a market for them. And the sales rep isn't paying for the exclusivity, but they get exclusivity as part of the incentive to participate in this deal. And to avoid crossing and to avoid diluting the market that's available to them.
Pankaj (08:50)
But it says purchase price of the exclusivity agreement is two hundred and fifty thousand dollars.
So who's purchasing?
Sahil (08:55)
so who is purchasing? So that means in this case JVF is receiving money and common stock from Medstrong. So that means Medstrong must be purchasing.
Pankaj (09:06)
But
grant JVF exclusive rights to fully develop.
But does that make sense if JVF is getting exclusive rights, don't they want to purchase the exclusivity right?
Sahil (09:13)
I think JVF is not having to purchase the exclusivity because it's the same as like a showroom where they get exclusivity as the sales and marketing contractor, and their compensation for doing that job is going to be the cash and the stock.
Pankaj (09:29)
But then they're also getting paid here under compensation.
Sahil (09:31)
Yeah, let's dive into that. So JVF will be compensated pursuant to the following three thousand dollars payable ten days after the execution of Letter of Intent and one thousand dollars monthly for the next nine consecutive months as an advance against commission reaches or achieves one thousand dollars per month. The advance stops.
Okay, and then it says for direct retail in the main territories, Medstrong will pay 20% commission and renewals be a part of item C below. JVF will execute all renewals and pay a $5 fee to Medstrong. Special sales deals involving large volume accounts. PDQ may be sold to the representative at net price based on volume. JVF will purchase PDQ basic at a front-end net cost
of two dollars and fifty cents per unit. Production quotas, maybe this gives us a little more context. JVF shall achieve a production quota of two hundred and fifty thousand dollars per year, commencing the second full year from the inception of the agreement. So
That sounds like JVF is also a purchaser.
So I
Pankaj (10:29)
Yeah.
Sahil (10:29)
think it's safe to say that this is drafted very poorly. it's
Pankaj (10:33)
Yeah. Yeah.
Sahil (10:34)
unclear to us what the cash component is, what the stock component is, who's the buyer, who's the seller, what is the exclusivity that's being exchanged. I mean, we can piece it together, but the fact that it is not clear on its face means that this should be drafted to be more clear.
Pankaj (10:51)
Yeah. So let's run through the other elements, the other elements
Sahil (10:53)
Yeah.
Pankaj (10:53)
that we're looking at.
Sahil (10:54)
Yeah. So then the next section that we'd look for is what you're agreeing to do after closing conditions. Are there any closing conditions in here?
Pankaj (11:01)
So closing, generally just so people know, closing you see in asset purchase, stock purchases, real estate, transactions, that's where that's where we see a lot of closing language. we're not necessarily gonna see closing, and you should just be aware of that. these are very deal specific Letters of Intent, look based on the industry. So here, instead of closing language, you're gonna see, okay, post engagement, what are the obligations of the parties?
So what what do we see there in terms of like post engagement or anything similar to closing here that we should be looking for?
Maybe production quotas, reporting.
Sahil (11:29)
Yeah, anything that says from the inception of the agreement or any language that says after the agreement. For example, we have a closing condition related to when there's a stock component that kicks in as part of the compensation.
even the whole compensation
Pankaj (11:42)
for just yeah.
Sahil (11:44)
section is a closing condition. Well, it's not necessarily
Pankaj (11:47)
No, it's not really a
Sahil (11:48)
a closing condition. It's more like a
It's a closing covenant or it's it's Yeah.
Pankaj (11:51)
performance obligation. it's a performance obligation, right?
So you just want to look at those performance obligations. You have to look at conditions precedent to closing, right? What are those requirements to close? The transaction here, they're gonna be making payments, right? There's gonna be some exchange of money and that's gonna be a requirement for closing. But is it, you know, it's not really clearly spelled out. It's saying
pay this purchase price, but when is it gonna be paid? Well, I guess it says 30 days after the Letter of Intent. So that's a condition. and then $150,000, 90 days. So these are potential, closing conditions. If these are not met, then the deal doesn't move forward. So these are just things you wanna look for in these types of agreements.
Sahil (12:24)
Right. And when we say move forward, that means there hasn't been full performance and so there's been a breach of this contract.
Pankaj (12:31)
Right, exactly. Exactly.
Sahil (12:32)
The next section we'd look for would be the diligence period. So usually in an asset sale or a stock purchase, there's a diligence period because there's going to be a transfer of assets or stock and you are effectively checking title. In this case, it's very unlikely that
we'd see a diligence period. This is effectively an exclusivity agreement. The next section we'd look for would be an exclusivity period, which is a shopping period or no shop period really, meaning that, the parties are allocating resources and time to evaluating the deal. So neither party wants this to fall apart because someone else interferes in the deal because someone gets a better offer. So
there's generally some kind of exclusivity period baked in the Letter of Intent because we know that from the point of the Letter of Intent to the formal purchase and sale agreement, some time is required. Now, in this case, they've consolidated a Letter of Intent and purchase agreement all in one. So there isn't an exclusivity period, but that's something that we would expect. It was worth control F-ing to see is there an exclusivity period. I mean
There is exclusivity in terms of territory, but is there
Pankaj (13:36)
Right.
Sahil (13:36)
exclusivity in terms of this deal?
Pankaj (13:38)
Yeah, I don't think
Sahil (13:38)
I suppose
there are. I mean, if you sign this agreement, then exclusive rights are going to JVF.
Pankaj (13:44)
Right, exactly. Yeah.
Sahil (13:45)
As long as this deal is in effect.
Pankaj (13:47)
They have the exclusive rights to fully develop market and sell Medstrong's patient data quickly, medical record online programs. So yeah, that's the exclusivity there. But exclusivity in a lot of deal terms is like the deal is locked up, so they can't shop it around. So that's just something people need to think about. What else should we look at we get to the AI?
Sahil (14:03)
we've got is confidentiality. Then those are critical because even in a Letter of Intent, you're revealing important aspects of your business that you don't want to get out to the public.
Pankaj (14:13)
Yeah, I don't see any confidential info here. So yeah.
Sahil (14:16)
So that's what somebody would bake in here as well.
Pankaj (14:19)
this is also missing a lot of standard terms, a lot general terms that we see, dispute resolution, severability. So that's something people should be aware of as well, especially if they're using it as a full on agreement. If they're not, if they're using it as an LOI, then you can probably do away with some of these general terms. But here they're using it as a full agreement and you really should always have those
jurisdiction dispute resolution mechanisms in here. what else?
Sahil (14:40)
Finally on that note, we're looking at is this binding or non-binding? Actually the terms are binding unless there's a non-binding, there's language saying it's non-binding. So if you were
Pankaj (14:46)
This is binding. Right. Exactly. Exactly. So that's
Sahil (14:51)
to have a follow-up agreement to this, you would have to make sure there's a clause in there plainly stating that it supersedes this Letter of Intent.
Pankaj (15:00)
Well let's go to Claude, our advisor that we always question. And so Sahil, this is our MD file, it's kind of hard to read, but this kind of tells Claude what to do.
what to look at based on some of the issues we've mentioned and flagged. So that's the agreement we put in. And now let's go to what the output was. So this is a three page letter. It says here's what it's looking at. And then the eight issues, the purchase price. So this is of high concern it says why it matters, it highlights the purchase price, it says
the cash closes, okay. The stock does not, which price includes one million shares can be read at least two ways. Medstrong delivers one million of its own shares to JVF as part of what JVF receives for the money, or B the shares are somehow counted towards satisfying the $250,000 reducing the cash owed. So yeah, it's not clear. And I think that was what we were saying. Overall that purchase price provision is not clear.
How does a million dollars factor in? How is it valued in this whole deal? So again, this is a drafting error, this is a drafting problem that they needed to reconcile. The cash closing, again, this is a high concern. There's no closing. It doesn't mention closing. This is probably because this is a different type of deal. We're oftentimes talking about asset purchases or M&A deals, but this is a licensing deal. But still you wanna just be aware of what is closing,
how does it work in the context of this deal? Next, you want to look at structure. Okay, so this is not an asset sale or stock sale. This is an exclusive license distribution deal. It says fully develop. It does use some ambiguous wording here. So what does it mean to say fully develop in the context of this deal? Things you really wanna just ask and be clear about because these are performance requirements, but if they're not clear in what those requirements are,
then there's definitely a risk for litigation because now there's ambiguity and what do the parties mean by this language. So you have to be extremely precise. This is why having a lawyer on your team is critical because we're gonna ask these questions, we're gonna ask these hard questions and make sure that we do the additional work to make sure that your deal is protected. Next is post-closing obligations. What the reader still has to do is a high concern. So
these continuing obligations, production quotas, termination by noncompliance with production quotas, compensation, there's different types of compensation. So these are kind of post closing obligations that you have to look at and are they reasonable? Can each party perform?
Sahil (17:01)
This is a very helpful tool. This gives you an example of what you can expect from the carbon tool that our firm is developing. and it also I think interestingly we did flag most of these items. And
Pankaj (17:14)
Yeah.
Sahil (17:15)
I think the good news is that these are the critical terms that are important to understand and
oftentimes when you're doing a deal with someone, people like to use a lot of smoke and mirrors or ambiguous language, but getting that language crystal clear is very important. Especially before you get to the purchase and sale stage, the point of the LOI is to get clear. So unlike the way they did this agreement where they merged the actual licensing agreement or the exclusivity agreement with along with the Letters of Intent.
We certainly would not recommend that. We would say hammer out the terms and Letters of Intent, and then you need a subsequent formal agreement.
Pankaj (17:51)
Absolutely. Absolutely. Yeah. That's the whole point of a Letter of Intent. It's establish the intent of the parties. Oftentimes also a Memorandum of Understanding serves a similar purpose, a term sheet. But you wanna make sure that you're clear on these terms, these essential terms and the material terms before you go to the full on agreements because those require a lot more time, money, investment. So if you're not clear on these terms and you're not a hundred percent clear on the deal and the transaction and how it's gonna work out, then you're gonna have
more problems at the PSA or investment doc or whatever it might be stage. So just remember that. We'll provide these information too in our show notes as to the other issues it caught but this tool can be really, really helpful for you. Remember below it's only for educational purposes. It's not a lawyer. We're not providing legal advice to this tool. This is what we've put together
based on our knowledge and the issues that we've flagged over the years, looking at many different agreements, terms of use, letters of intent. And these are the issues you really gotta look out for. And I think this tool does a great job of flagging those issues, making aware of them. But then, actually redlining, revising them, that's where we can help you figure out what makes sense, where you should push and where maybe it's okay to give in a little bit.
And we hope you find this very helpful.
Sahil (18:57)
Absolutely. Well, thank you all for joining us on this week's episode of Letters of Intent. This is the podcast for deal makers and risk takers. And we will see you next time.
Pankaj (19:08)
See you next time. Happy deal making.