Letter of Intent vs MOU vs Term Sheet: What's the Difference, and Which One Do You Need?

Written by: Prakhar Rai, Advocate | Founder, My Legal Pal | Enrolled with the Bar Council of India | NLSIU Bangalore alumnus | Contracts and corporate lawyer

Last reviewed: 15 October 2026

Quick answer

A letter of intent (LOI), a memorandum of understanding (MOU) and a term sheet are all documents you sign before the real contract. They record that two sides are serious and roughly agree on the deal, and they usually leave the final legal terms for later.

By habit, a term sheet lists the headline terms of a financing or acquisition, an LOI is a letter setting out one side’s proposal (often to buy, invest in or lease something), and an MOU records a shared understanding between two parties, often for a partnership or a joint project. In practice the names overlap, and courts ignore the label.

What decides the legal effect is the wording. Most of these documents are non-binding on the commercial deal itself, yet binding on a few clauses such as confidentiality, exclusivity and costs. If you get that split wrong, a document you thought was a polite handshake can turn into a contract, or a document you thought was a deal can be worth nothing.

The three documents side by side

	Letter of intent (LOI)	Memorandum of understanding (MOU)	Term sheet
Usual purpose	One party states its intent and proposed terms, often to buy, invest, lease or supply	Both parties record a shared understanding of how they’ll work together	Summarise the key commercial terms of a deal before long documents are drafted
Common in	Acquisitions, real estate, large commercial deals	Partnerships, joint projects, government and academic tie-ups, cross-border cooperation	Venture funding, M&A, joint ventures
Style	A letter from one party to the other	A short agreement-style document signed by both	A table or bullet list of terms
Detail	Medium: price, structure, timeline, conditions	Often general: aims, roles, scope of cooperation	High on numbers: valuation, equity, rights, conditions
Binding?	Mostly no, with specific binding clauses	Depends on the wording, and many are meant to be non-binding	Mostly no on the deal, with binding clauses (confidentiality, exclusivity)
What comes next	Due diligence, then the definitive agreement	Specific agreement, such as a joint venture or services contract	Definitive agreements, such as a share purchase or investment agreement

If you remember one thing from this table, make it the last row. All three are stepping stones. None of them is meant to be the deal.

The label doesn’t decide whether it’s binding

This is the point most online summaries get wrong, so let me be direct about it. Calling a document “non-binding” in its title does not make it non-binding, and calling it an “MOU” does not make it a lesser document than a contract.

Courts in most legal systems look at four things:

What the parties intended. Did they mean to be bound now, or only to record a plan?
What the document says. Phrases such as “legally binding”, “non-binding” and “subject to contract” carry a lot of weight.
How complete the terms are. A document with price, subject matter, dates and obligations all fixed looks like a contract. One that says “to be agreed” on the main points looks like a plan.
What the parties did afterwards. If one side started performing and the other accepted the benefit, a court may treat the document as a real deal.

How this plays out depends on the country.

Country	General approach	Worth knowing
India	Intention and certainty decide. An agreement whose meaning is uncertain is void under Section 29 of the Indian Contract Act, 1872.	Mentioning a future formal contract does not by itself stop a binding bargain forming (Kollipara Sriramulu v. T. Aswatha Narayana, 1968). Where material terms were never settled, no contract arises (Rickmers Verwaltung GmbH v. Indian Oil Corporation, 1999).
United States	Courts enforce what the parties actually agreed, and a “non-binding” label is not always the end of it.	Some states recognise a binding duty to negotiate in good faith if the document says so. In SIGA Technologies v. PharmAthene (Delaware, 2013), a term sheet obligation to negotiate in good faith led to damages. In Texaco v. Pennzoil (1987), a preliminary memorandum of agreement was held to bind the parties.
England and Wales	A bare agreement to negotiate is generally not enforceable (Walford v Miles, 1992), and “subject to contract” is strongly respected.	Parties can still bind each other on specific points, such as confidentiality and exclusivity for a fixed period, if the wording is clear.
Civil law countries (for example Germany)	Some systems recognise pre-contract duties of good faith.	Breaking off talks without reason after creating strong expectations can create liability in some systems, even without a signed contract.

This is general information. Case law changes and the result in a real dispute depends on the exact wording and facts, so check the current position for your country before you rely on any of it.

The practical message is the same everywhere. Say clearly what is binding and what is not, in the document itself.

What is a letter of intent?

A letter of intent is a written statement that one party intends to do a deal with another, along with the main terms it has in mind. The classic example is a buyer writing to a seller: “We intend to acquire your business for roughly this price, on this structure, subject to due diligence and a definitive agreement.” Landlords, investors, large customers and suppliers also use LOIs.

What goes in a good LOI

The parties and the transaction. Who is buying what from whom.
Price or pricing method. A figure, a range, or a formula.
Structure. For example, asset purchase or share purchase.
Conditions. Due diligence, financing, regulatory approvals, key hires.
Timeline. Target dates for diligence, signing and closing.
Exclusivity. A period in which the seller will not shop the deal to others.
Confidentiality. Often by reference to an NDA that already exists. See our guide to non-disclosure agreements.
Costs. Each side pays its own, unless agreed.
Binding and non-binding statement. The most important paragraph in the letter.
Expiry. The letter lapses if the deal is not signed by a date.

One-way or two-way

Some LOIs are written by the buyer and countersigned by the seller to show acceptance. Others are signed by both. Neither style changes the rule above: the wording decides.

Other meanings of “letter of intent”

You may also see the term used in other settings, such as a student committing to a college or a company announcing it will place an order. This article is about the business LOI used before an acquisition, investment, partnership or large commercial deal.

If you are planning to buy or sell a business, our page on mergers and acquisitions explains how the LOI fits into the whole process, and the M&A due diligence checklist covers what happens after you sign it.

What is an MOU (memorandum of understanding)?

An MOU records that two or more parties have reached a common understanding about a plan: what they will try to do, who does what, and how they will work together. The language is usually more cooperative and less commercial than an LOI.

You will see MOUs in:

partnerships and strategic alliances that are still being shaped,
joint projects between companies, universities and research bodies,
government and public-sector tie-ups,
cross-border cooperation where the parties want something signed before a full contract is possible,
early co-founder or business-partner understandings, which we discuss in our founders’ agreement guide.

MOUs in India

MOUs are used very widely in India, and the single biggest mistake is signing one casually, assuming it can’t be enforced. Indian courts have enforced MOUs when the parties meant to be bound and the terms were clear enough. They have refused to enforce them when essential terms were missing or when a formal contract was clearly still to come.

Stamp duty is the other trap. Whether an MOU needs stamping, and how much, depends on the state and on what it records. If it records an agreement or creates rights and duties, treating it as a “mere MOU” does not remove the duty. An unstamped instrument may not be usable as evidence until duty and penalty are paid. We cover the basics in is a contract valid without stamp paper in India.

MOU vs a proper agreement

If you want to be bound, do not use an MOU. Use an agreement. A short, plain collaboration contract is better than an MOU that is vague and half binding. Our guide to the collaboration agreement explains when that is the better route, and if you are building technology together, a joint development agreement is the document you eventually need.

What is a term sheet?

A term sheet lists the main terms of a transaction, usually in bullet points or a table, so both sides can agree the commercial deal before lawyers draft long documents. It is the default document in venture funding and common in acquisitions and joint ventures.

In a funding round, a term sheet typically sets out:

the investment amount and valuation,
the type of security (shares, convertible note, SAFE),
liquidation preference and anti-dilution protection,
board seats and investor veto rights,
founder vesting,
conditions to closing, exclusivity and confidentiality.

Almost all of that is non-binding. The exceptions are the clauses that protect the process.

The wording of a term sheet becomes the template for the later documents, so a bad term can follow you into every agreement. That’s why we wrote a separate guide on term sheet red flags founders should never agree to. If you want help with the document itself, see our term sheet drafting service, the term sheet and SAFE note review service for Indian startups, and the M&A term sheet template.

For the funding instruments themselves, see our guides to SAFE agreements and convertible notes and what an investor agreement covers.

Term sheet vs LOI

This is the comparison people search for most, and the honest answer is that they overlap.

A term sheet is a list of terms. A letter of intent is a letter with terms in it.
Term sheets are more common in funding and are built around numbers and rights. LOIs are more common in acquisitions and commercial deals and read more like a proposal.
Either can be binding on a few clauses and non-binding on the rest.

If your counterparty uses the other word, don’t argue over it. Read what it says.

What is binding and what isn’t

In a typical pre-contract document, the commercial deal is non-binding, and a handful of process clauses are binding. This is what that usually looks like.

Usually non-binding	Usually binding
Price or valuation	Confidentiality of the discussions and information shared
Deal structure	Exclusivity (no-shop) for a fixed period
Timeline and target dates	Costs: each side pays its own
Representations and warranties to come	Governing law and dispute resolution
Conditions such as diligence and approvals	Good-faith negotiation, if the parties agree to it
Plans for management or roles	Break fee, if one is agreed
The agreement to sign a definitive agreement later	The clause that says what is binding

Three of these deserve a closer look.

Exclusivity. A seller who signs an exclusivity clause cannot talk to other buyers during the period. It’s valuable to the buyer and should always have an end date. If you are the seller, keep it short and tie it to the buyer’s progress.

Good-faith negotiation. A promise to negotiate in good faith can be enforceable in some places (parts of the US, for example) and almost meaningless in others (England and Wales, in the usual case). If you want it, define what it means. If you don’t, say that no obligation to negotiate or complete arises.

The binding clause itself. The clause that says “except for Clauses 6 to 9, this document is not legally binding” is what keeps your non-binding terms non-binding. Treat it as the most important sentence in the document.

Which one should you use?

Choose the document that fits the deal, and spend your effort on what it says.

Your situation	Best fit	Why
Raising money from investors	Term sheet	It’s the standard in funding and sets the template for later documents
Buying or selling a company	LOI (or a term sheet)	Records price, structure and exclusivity before diligence
Exploring a partnership or joint project	MOU	Shows shared intent and roles without committing too early
Two organisations cooperating, such as company and university	MOU	Common and expected, but state clearly what binds
Landlord and tenant agreeing key terms before a lease	LOI or heads of terms	Locks in the headline terms
Large customer signalling an order	LOI	Be careful: it may be read as a commitment
You want both sides legally committed now	A real agreement	Don’t use a pre-contract document
One side is performing work or paying money right away	A real agreement	A letter of intent with performance behind it can become a contract by conduct

A sensible rule: if money is moving, people are working, or someone is giving up an opportunity because of the document, you need a proper contract, even a short one.

How to draft one that does what you want

Whichever you pick, these habits protect you.

Put the binding statement near the top. Say plainly what is binding and what isn’t, rather than burying it in the last paragraph.
Use “subject to contract” where you mean it. It signals that no deal exists until the definitive agreement is signed. It helps, but only with consistent wording and conduct.
List the binding clauses by number. Don’t rely on a general sentence.
Avoid vague promises. “Parties will use best efforts to cooperate” can create arguments. State specific, limited duties or none.
Set an expiry date. An exclusivity period or the document itself should lapse on a stated date.
Keep the commercial terms honest. Don’t put figures in that you don’t intend to stand behind. A number in a signed document can be quoted back to you later.
Watch your behaviour. Don’t start performing, spending or announcing the deal as if it were final.
Check stamping and formalities. In India, think about stamp duty at signing, not at the dispute.
Mind the audience. An LOI shown to a bank or regulator may be read as a commitment.
Get the definitive agreement drafted early. Parallel drafting shortens the gap between interest and signature.

Sample wording

These are illustrations. Adapt them with advice for your own deal.

Non-binding statement:

This letter sets out the parties’ present intentions. Except for Clauses [6] (Confidentiality), [7] (Exclusivity), [8] (Costs) and [9] (Governing Law), which are legally binding, this letter is not legally binding and creates no obligation on either party to proceed with the Transaction. No contract for the Transaction will exist until a definitive agreement has been signed by both parties.

Exclusivity with an end date:

For [45] days from the date of this letter (the “Exclusivity Period”), the Seller will not solicit, negotiate or accept any proposal from any other person for the sale of the Business. The Exclusivity Period ends automatically if the Buyer notifies the Seller that it will not proceed.

Costs:

Each party will bear its own costs and expenses in connection with this letter and the Transaction, whether or not the Transaction completes.

Mistakes that cause real problems

Assuming “non-binding” in the title protects you. If the body contains firm obligations, a court may enforce them.

Signing an MOU as a courtesy. Some MOUs are signed at an event or to please a partner. If it has clear terms and you start acting on it, you may be bound.

Leaving out the binding clauses. Without confidentiality and exclusivity, the other side can use what you’ve shared or shop your deal.

Exclusivity with no end. The seller is locked in while the buyer takes its time.

Putting too much detail into a document meant to be loose. The more complete it is, the more it looks like a contract.

Treating a term sheet as final. Valuations and rights can still change at diligence, but the first draft sets expectations. Negotiate it as if it were the deal.

Ignoring stamp duty and local formalities. This is a particular risk in India and anywhere else with transaction taxes on instruments.

Using these documents across borders

If the parties are in different countries, a few extra points apply.

Choose a governing law for the binding clauses, even if the deal itself will be under another law.
Language matters. Words like “binding”, “intend” and “best efforts” do not translate cleanly, and a bilingual document should say which version prevails.
Pre-contract liability differs. Some civil law countries, such as Germany, impose good-faith duties in negotiations. Our page on contract lawyers in Germany explains how we work with local rules.
Check approvals and disclosure. Public companies, foreign investment rules and competition law can apply to deals at the LOI stage.
Use a neutral dispute mechanism for the binding clauses. Our comparison of arbitration vs litigation in cross-border contracts explains the options. If the later contract will be under Indian or US law, see our pages on contract lawyers in India and contract lawyers in the USA.

What to do after you sign

A pre-contract document is the start of the work, not the end of it.

Run due diligence. Verify what you were told. Our IP due diligence guide shows what investors check.
Draft the definitive agreement. Share a first draft early. Our contract drafting service builds agreements for your deal.
Review what the other side sends. Our contract review service flags the risks before you sign.
Negotiate the open points. Contract negotiation support helps you hold your position.
Make sure the basics are in the final contract. See what should be included in every business contract.

How we can help

We help founders, investors and businesses draft and read these documents before they become expensive.

Draft an LOI, MOU or term sheet so it says what you intend, with the right binding clauses.
Review a document you’ve been sent before you sign it or return it.
Negotiate the terms with the other side.
Turn it into a full agreement once the deal is real.

Got a letter of intent, MOU or term sheet to draft or check? Tell us the parties, the deal and the deadline. We’ll come back with a clear scope and fixed fee. Get a quote or message us on WhatsApp. For ongoing startup support, see our legal retainer.

This article is general information, not legal advice for your situation. Laws and court decisions differ by country and change over time. For a specific deal, get advice on the governing law before you sign.

Frequently asked questions

Is a letter of intent legally binding?

Usually not on the main deal, but it can be binding on specific clauses. Confidentiality, exclusivity and costs are often binding, while price, structure and timeline are not. The document’s wording and the parties’ intention decide, not its title.

Is an MOU legally binding in India?

It can be. Indian courts look at whether the parties intended to be bound and whether the terms are certain enough to enforce. An MOU with clear obligations and no need for a later formal contract is more likely to bind. One that leaves key terms open is less likely to, and Section 29 of the Indian Contract Act treats uncertain agreements as void.

What is the difference between an LOI and an MOU?

An LOI usually comes from one side and sets out a proposal, often to buy, invest or lease. An MOU is signed by both sides and records a shared understanding of how they’ll cooperate. In practice the terms overlap, and the legal effect depends on the wording of each.

What is the difference between a term sheet and a letter of intent?

A term sheet lists the key terms of a deal, often as bullets or a table, and is standard in venture funding. An LOI is a letter that states intent and terms, and is common in acquisitions and commercial deals. Both are usually non-binding apart from a few clauses.

Is a term sheet binding?

Mostly not. Valuation, rights and structure are normally non-binding. Confidentiality, exclusivity and costs are often binding. Some jurisdictions enforce a promise to negotiate in good faith if the term sheet contains one.

Do I need a lawyer for an LOI or MOU?

You can sign one without a lawyer, but it is a cheap step to have one checked. The cost of a poorly worded binding clause, an exclusivity period with no end or a stamping problem is much higher than the cost of a review.

Is stamp duty payable on an MOU in India?

It can be. It depends on the state’s stamp law and on whether the MOU records an agreement or creates rights and obligations. An instrument that needs stamping but is not duly stamped may not be admissible in evidence until duty and any penalty are paid. Check the position in the relevant state.

What is “subject to contract”?

It is a phrase showing that the parties do not intend to be bound until a formal contract is signed. Courts in many countries respect it, but only when the document and the parties’ conduct are consistent with it.

What are heads of terms?

It’s the term used in the UK and some other countries for what is essentially a term sheet or LOI: a document setting out the main points of a deal before the full contract.

Legal references

Indian Contract Act, 1872, sections 2(h), 10 and 29; Indian Stamp Act, 1899 and state stamp laws; Kollipara Sriramulu v. T. Aswatha Narayana, AIR 1968 SC 1028; Rickmers Verwaltung GmbH v. Indian Oil Corporation Ltd. (Supreme Court of India, 1999); Walford v Miles [1992] 2 AC 128 (House of Lords); SIGA Technologies, Inc. v. PharmAthene, Inc. (Delaware Supreme Court, 2013); Texaco, Inc. v. Pennzoil Co. (Texas Court of Appeals, 1987); section 311 of the German Civil Code (BGB).

Contracts & Agreements

Letter of Intent vs MOU vs Term Sheet: What’s the Difference, and Which One Do You Need?