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
- The headline price is usually an enterprise value. Debt, transaction expenses and working capital adjustments come out before stockholders get anything.
- Ask for a payout model before you sign, showing what each stockholder and option holder receives.
- Cash at closing is worth more than escrow, an earnout or private buyer stock, so value each piece separately.
- In deals without representations and warranties insurance, the indemnity escrow is commonly around 10% of the price. With insurance it’s usually much smaller.
- Closing conditions tell you how certain the deal is. A financing contingency is a red flag.
- Golden parachute rules, deal structure and QSBS need a tax advisor before you sign.
Why do the LOI economics matter if the LOI isn’t binding?
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.
How do I get from the headline price to what stockholders receive?
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.
What does the payout actually look like?
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.
Should I take cash or buyer stock?
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.
What happens to options, the team and the founders?
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.
How do escrow, indemnity and earnouts work?
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.
How certain is the deal to close?
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.
What needs a tax advisor before I sign?
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.
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.
Checklist: questions to answer before you sign the LOI
- What comes off the headline price, and what is the working capital peg?
- How much is cash, how much stock, and how is the stock valued?
- What does each stockholder and option holder receive in the payout model?
- How big is the escrow, how long does it last, and is it the sole recourse?
- Is there an earnout, and how is it measured?
- Are options assumed or cashed out, and is the retention pool inside or on top of the price?
- What are the closing conditions, and is there any financing contingency?
- How long is exclusivity?
- Has a tax advisor reviewed 280G, structure and QSBS?
For more, see 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.
