Where it is still too premature for a company and prospective investor to sign a Shareholders’ Agreement, a Memorandum of Understanding (MOU) offers a simple, non-binding method to record preliminary terms of the proposal.
While the formal agreement is being negotiated, an MOU establishes trust and alignment on commercial expectations without locking either into full legal obligations.
What is an Investment MOU?
An Investment MOU is a document that outlines preliminary terms between an investor and a company and while each should be tailored to a specific deal, they usually cover:
- investment amount and type
- valuation or pricing mechanism
- intended use of funds
- timeline for due diligence or execution
- any exclusivity or confidentiality terms
This sets a framework for further negotiation, due diligence, and legal documentation.
When to use it
MOUs often come into play during early fundraising discussions, but can come into play whenever:
- an investor wants exclusivity to explore a deal
- a company seeks a soft commitment before investing in due diligence or legal counsel
Ultimately, if both sides want to align on valuation cap, equity type, board rights, voting terms, and other key terms without triggering binding obligations, it’s a solid reason to consider an MOU.
Key inclusions
A well-drafted Investment MOU balances clarity with flexibility, capturing key terms that both parties need to align on without being exhaustive.
Here are common inclusions:
| Inclusion | Description |
| Parties | Identify investor and investee |
| Investment Terms | Specify investment amount, type (e.g. ordinary or preference shares), and pricing basis |
| Conditions Precedent | Outline requirements before formalisation (e.g. due diligence, board/ shareholders’ consent) |
| Use of Funds | Describe fund allocation (e.g. R&D, expansion, working capital) |
| Exclusivity | If the company can approach other investors during MOU validity |
| Confidentiality | Protect sensitive information exchanged during discussions |
| Legal Effect Clause | Clarify if the MOU is binding, non-binding, or partially binding |
| Timeline | Set out milestones for due diligence, documentation, and signing |
Common pitfalls to avoid
While an Investment MOU is a relatively simple pre-deal document, taking it for granted may lead to the following common mistakes:
- omitting exclusivity clauses which allows the company to engage other investors concurrently
- no clear timeline for due diligence leading to prolonged uncertainty and loss of momentum
- not distinguishing binding from non-binding terms for clauses on confidentiality or exclusivity
These can weaken a party’s bargaining power and lead to misunderstandings and disputes that undermine any goodwill built.
Conclusion
An Investment MOU clarifies structure, valuation expectations, and deal timelines, helping both parties avoid misunderstandings as they progress toward a formal agreement.
If you are looking to raise capital or invest in a company, we can help draft a clear MOU that protects your interests and sets the right foundation for the subsequent Shareholders’ Agreement.
