Anatomy of a Bad LOI: 8 Crucial Deal Terms You Must Check
There is a reason this podcast is called Letters of Intent. These documents establish the groundwork for nearly every transaction, whether you are licensing technology, selling assets, transferring stock, or entering an employment relationship. A good LOI gets everyone on the same page early. A bad one can quietly wreck your deal.
As Pankaj put it in Episode 69, an LOI can make or break a deal. And it is remarkable how often clients sign these documents before their lawyers ever see them. So in this episode, Pankaj Raval and Sahil Chaudry walked through a real, deeply flawed LOI and showed exactly what goes wrong. Here is the protocol they use and what founders should learn from it.
The Eight-Point LOI Protocol
Before diving deep into any letter of intent, the deal attorneys at Carbon Law Group run through eight sections. This checklist catches most of the serious problems fast.
Here is what they look for:
- The purchase price. What is the total consideration for the deal?
- Cash at closing. How much actual cash changes hands, and when?
- What is being sold, and who are the buyer and seller. This sounds obvious. It often is not.
- Post-closing obligations. What each party must do after the deal closes.
- The diligence period. How long the buyer has to inspect what they are buying.
- The exclusivity period. Whether the parties can shop the deal elsewhere.
- Confidentiality. Protection for the sensitive information you reveal during negotiations.
- Binding or non-binding. Which terms actually create legal obligations.
Think of this list as a pre-flight check. A pilot does not eyeball the plane and take off. They run the same sequence every single time, because the cost of missing something is enormous.
The same logic applies to your deals. When you review an LOI against a consistent checklist, gaps become obvious. When you skim it because you are excited about the opportunity, those gaps stay hidden until they cost you money.
In the episode, the hosts ran this protocol live on an actual LOI. What they found was instructive, and not in a good way.
Red Flag One: Merging the LOI With the Formal Agreement
The first problem appeared at the very top of the document. It described itself as both a formal agreement and a letter of intent.
That combination is a serious red flag. As Pankaj explained, you generally have one or the other. A letter of intent is a letter showing the parties’ intention to do a deal together. It lays out the base terms, identifies what is binding and what is not, and then leads to a formal agreement.
Trying to do both at once creates real risk. You end up with a document that is neither a clean statement of intent nor a properly drafted contract. If a dispute arises later, that ambiguity becomes expensive.
Pankaj’s guidance was direct. If you are going to do a full agreement, do a full proper agreement. If you are not, make sure your LOI is genuinely clear about what is binding and what is not.
Here is why the two-step process matters so much. An LOI is cheap and fast. A formal purchase and sale agreement takes serious time, money, and investment. The whole point of the LOI is to get clear on the material terms before you spend that money.
Think of it like an architectural sketch before blueprints. You want to agree on the shape of the house before anyone engineers the foundation. Skip the sketch, and you may discover the disagreement after the concrete has already been poured.
Red Flag Two: An Unclear Purchase Price
Next, the hosts searched for the purchase price. They found one, but it raised more questions than it answered.
The document stated that the purchase price of the exclusivity agreement was $250,000, plus $50,000 for exclusive rights in Venezuela. That price supposedly included one million shares of common stock in the seller’s company. Payment was structured as $100,000 within 30 days of signing the LOI, then $150,000 ninety days after that, or $200,000 with the Venezuela territory.
Read that again, and the confusion becomes clear. How do a million shares of stock factor into a $250,000 price? Are the shares part of what the buyer receives for the money? Or do the shares somehow count toward satisfying the $250,000, reducing the cash owed?
Both readings are plausible from the language. That ambiguity is a drafting failure the parties needed to reconcile before signing anything.
There is a second problem hiding in the payment schedule. The first $100,000 comes due just 30 days after the LOI is executed. But at that point, there is no formal purchase agreement in place. The services and license terms have not been fleshed out at all.
So real money changes hands before anyone has defined what the buyer actually receives. As Sahil noted, that leaves enormous room for disagreement.
The lesson for founders is simple. Your price term must state the total consideration, the form of that consideration, and the timing with precision. If two smart lawyers can read your price clause two different ways, it is not finished.
Red Flag Three: No Clear Cash or Closing
When the hosts searched the document for the word “cash,” they found nothing. Searching for “closing” produced the same result.
That absence deserves context. Closing language appears most often in asset purchases, stock purchases, and real estate transactions. This particular deal was a licensing and exclusivity arrangement, so a traditional closing section was less expected.
Still, the question matters in every deal. You need to know what closing means in your specific context and how it works. When does the transaction actually become effective? What has to happen first?
In this document, the payment milestones function as informal closing conditions. The buyer pays $100,000 within 30 days, then $150,000 ninety days later. If those payments do not happen, the deal does not move forward.
Sahil made an important clarification here. When a deal does not move forward because a party failed to perform, that is not a neutral outcome. It means there has been a breach of contract.
So even in a non-standard deal, map out the cash. How much, in what form, on what date, and tied to what condition? Then decide what happens if a party misses a milestone. This is exactly the kind of question we walk clients through, because a deal that feels straightforward in conversation often reveals a dozen unanswered questions once you put it on paper.
Red Flag Four: Who Is Actually the Buyer?
This is where the LOI truly fell apart, and it is worth spending time on, because the confusion is so instructive.
The document said the seller would grant the other party exclusive rights to fully develop, market, and sell its medical records product. Reading that, you would assume the party receiving exclusivity is the buyer, paying for the privilege.
But the purchase price clause muddied everything. Then the compensation section muddied it further. Under that section, the party receiving exclusive rights would also get $3,000 payable ten days after signing, plus $1,000 monthly for nine consecutive months as an advance against commission. They would earn a 20 percent commission on direct retail sales, pay a $5 fee on renewals, and purchase product at $2.50 per unit. On top of that, they had to hit a production quota of $250,000 per year starting in the second full year.
So which is it? Is this party buying exclusive rights, or are they a sales representative being paid to develop a market?
Pankaj and Sahil went back and forth on this live, and the fact that two experienced deal attorneys could not resolve it from the document is the entire point. Sahil compared it to a showroom arrangement in fashion, where a sales rep receives exclusivity as an incentive rather than paying for it. That reading is reasonable. So is the opposite reading.
As Sahil concluded, this was drafted very poorly. You could piece the intent together, but the fact that it was not clear on its face means it needed rewriting.
Your deal documents must state plainly who is getting what, and in exchange for what. Money flow and roles cannot be a puzzle.
Red Flag Five: Vague Performance Obligations
The phrase “fully develop” appeared in the grant of rights. It looks harmless. It is actually a litigation risk.
What does “fully develop” mean in the context of this deal? Reasonable people will answer differently. One party might consider a modest marketing push sufficient. The other might expect a national campaign.
That gap matters because performance obligations define breach. If the requirements are not clear, neither party knows when the other has failed. As Pankaj noted, ambiguity in performance language creates real exposure to litigation, because the dispute becomes an argument about what the parties meant.
The fix is precision. Performance requirements and post-closing obligations must be exact and measurable. Instead of “fully develop,” specify the activities, the timelines, and the benchmarks.
The hosts also drew a useful distinction. Some of what looked like closing conditions were really performance obligations or closing covenants. A condition precedent is something that must happen before closing. A performance obligation is something a party must do on an ongoing basis. Both belong in a deal, but they do different jobs.
For founders, the practical test is this. Read every obligation in your agreement and ask whether a neutral third party could determine, with evidence, whether you satisfied it. If not, rewrite it.
Red Flags Six, Seven, and Eight: Diligence, Exclusivity, and Confidentiality
The final protocol items revealed more gaps.
Diligence period. In an asset sale or stock purchase, you expect a diligence period, because the buyer needs to inspect what they are acquiring and effectively check title. In a pure exclusivity arrangement, that section is less likely to appear, and indeed it did not here. That absence was defensible given the deal type.
Exclusivity period. This one is different, and its absence was a genuine miss. An exclusivity period, sometimes called a no-shop provision, prevents either party from shopping the deal while they negotiate. Both sides invest real resources evaluating a transaction, and nobody wants the deal to collapse because someone else swooped in with a better offer. Since time always passes between the LOI and the formal agreement, most LOIs include this protection. This document had territorial exclusivity, but no deal exclusivity locking the transaction itself.
Confidentiality. Pankaj searched and found nothing. That is a meaningful problem. Even in a letter of intent, you reveal important aspects of your business that you do not want reaching the public. Confidentiality provisions are critical, and this LOI simply omitted them.
The document was also missing an array of standard general terms, including dispute resolution, severability, and jurisdiction. If you are using a document as a full agreement, as these parties were, those provisions are essential. Without a dispute resolution mechanism, you have no agreed path when things go wrong.
Binding or non-binding. Here is the detail that surprises many founders. Terms are binding by default unless the document expressly says otherwise. This LOI was binding. So if the parties later signed a follow-up agreement, they would need a clause plainly stating that it supersedes this letter.
Where AI Helps, and Where It Does Not
The episode also introduced something practical. Carbon Law Group built a downloadable file you can upload to Claude, ChatGPT, Gemini, or Perplexity to triage your own LOI against these eight points.
The hosts ran the flawed document through it live, and the output was genuinely useful. The tool flagged the purchase price ambiguity as high concern, catching the exact issue the hosts had identified about the million shares reading two different ways. It flagged the missing closing language and correctly identified the deal structure as an exclusive license and distribution arrangement rather than an asset or stock sale. The ambiguity in “fully develop” got caught too, along with the post-closing obligations, from production quotas to termination triggers to the layered compensation.
But Pankaj added an important caution. AI is a great tool if you know how to use it, yet it should not be the only thing you rely on. These models train on enormous amounts of data, and not all of that data is good. An expert still needs to review your LOI.
Here is the distinction that matters. The tool flags issues and raises questions, which is valuable triage. But redlining the document, revising the terms, and deciding where to push versus where to concede requires judgment. It also requires someone asking the questions you never thought to prompt. As Sahil joked, the tool gives you Pankaj and Sahil on your desktop with slightly less charisma. It is educational, not legal advice, and not a substitute for counsel.
What This Means for Your Next Deal
Whether your transaction is worth $250,000 or $250 million, the same principles apply. The LOI is where you get clear, and clarity is cheaper than litigation.
So run the protocol on any letter of intent that crosses your desk. Confirm the purchase price and how each component is valued. Check the cash, the timing, and the conditions. Identify who buys, who sells, and what changes hands. Make sure performance obligations are measurable. And verify the diligence, exclusivity, confidentiality, and binding-status terms.
Then keep the two stages separate. Hammer out the material terms in the letter of intent, then follow it with a properly drafted formal agreement. Merging them, as these parties did, invites exactly the confusion that fuels disputes.
Above all, do not sign before someone qualified reviews it. The most common problem Pankaj and Sahil see is not a badly negotiated LOI. It is an LOI that arrives on their desk already signed, with terms the client wishes they had never agreed to.
At Carbon Law Group, we review, redline, and negotiate letters of intent for founders and growing companies. We ask the hard questions, spot the ambiguities, and help you decide where to hold firm and where a concession makes sense.
If you have an LOI in front of you right now, do not sign it blind. Contact Carbon Law Group today at carbonlg.com to schedule a consultation. Until next time, happy deal making.
Carbon Law Group’s links: https://linktr.ee/carbonlawgroup