Letters of Interest
October 8, 2015
Assembling a Team to Take Your Idea from Drawing Board to Board Room
I recently fielded a question from a person interested in starting a new business. It went something like this:
I have an idea, but I haven’t yet formed any business organization, such as an LLC, Corporation, or Partnership. People have contacted me to express interest in being involved, and are offering to help with my project. Of course, this project is a start-up with some financing needs; so, I’m trying to put together a package of information for potential investors to review. Is there a way I can legally say people are involved, even though no one is being paid any money, and there’s not even an existing company yet? What information about these people who want to be involved do I need to include in my business plan? No one has been hired, but, if money were no object, I could quickly create a staff from the available pool of interested individuals. Clearly, that could be a benefit to investors, but how do I communicate that in a way that is not misleading and won’t open me up to legal liability?
As the Small Businesses & Startups Aspect of Practice Leader for the National Center for Preventive Law, I have the opportunity to talk to people from all over the U.S., and beyond, about their start-up issues; and I am intrigued by this question about what sounds like a very exciting start-up opportunity!
While one cannot ethically or legally state that a person is “involved” with their business if the business does not yet exist, he can ask interested parties to give him letters expressing their commitment to what he is trying to do. A Letter of Interest from a prominent business professional who wants to work for one’s new venture could be very meaningful to potential investors. At some point, however, one is going to need to pull the trigger, and form a business organization of some kind–an LLC, a corporation, or maybe just a partnership.
By the way, that’s a great way to raise initial start-up capital for one’s business! If one obtains Letters of Interest from people who want to invest in his company, they could be the initial members in his LLC, for example; and, as such, they would bring an initial capital contribution to the company, giving it much-needed seed money to begin operations. This is a great way to start a business with equity, instead of debt.
If the people who are interested in joining one’s venture aren’t interested in being equity holders, if these individuals simply want to work for him as employees and nothing more, getting Letters of Interest from them will still be valuable, because he can showcase his top talent in meetings with potential investors.
Tips for Using Letters of Interest
The following are tips to help you use Letters of Interest in assembling your future staff and communicating with prospective investors.
1. Create a Written Business Plan.
A “description of your management team, including the experience of key team members and previous successes,” is an essential component of your business plan. (Forbes) Even beyond describing your management team, I believe it’s important to include in your business plan information about any key personnel, even those who may not be on your management team or who may not be “C-Level employees.” If you don’t have a written business plan, you need to create one before you do anything else with respect to getting a prospective business venture started. It doesn’t have to be perfect; it just has to be better than nothing.
2. Obtain Letters of Interest.
Maybe, like the person whose question I answered, you have people knocking your proverbial door down, trying to get involved with your entrepreneurial venture. Maybe you need to seek out some talented people to really bring your idea to life. Whatever the case may be, you need to get some kind of non-binding statement from the people you want to be involved in your business; this can take the form of Letters of Interest. The letter should include personally identifying information, information relevant to their skills or resources, and a clear statement regarding their interest in performing a specific function or serving in a specific role in your (future) business.
3. Obtain Permission to Include Letters of Interest in your Written Business Plan and to Disclose the Contents of the Letters of Interest to Prospective Investors.
Along with the Letters of Interest, you’re going to want to use a form contract which will permit you to disclose to other people, like prospective investors, the contents of the Letters of Interest you collect. Getting permission to use confidential information disclosed to you is important.
What if someone who wants to be involved in your business writes you a Letter of Interest, and a prospective investor mentions to someone else that this person who wants to be involved is on board; and what if word gets around to the employer of the person who wants to be involved, and they lose their job? What if they want to sue you for that loss of income, because you were negligent in how you handled sensitive information about them? Whether or not they are successful in such a lawsuit, you may have to address the threat of litigation, taking time and other valuable resources away from your start-up.
Sometimes, it’s easier to ask forgiveness than permission. This is not one of those times.
4. Clearly and Expressly Communicate with Prospective Investors About Your Team.
Make a reasonable, good faith effort to ensure information is accurate when you provide it to prospective investors and other people who want to be involved with your fledgling business. Also, make sure you use language like, “to the best of my knowledge,” and “I believe,” rather than absolute statements of fact. If something turns out to be inaccurate, you want to leave yourself room to honestly say, “I communicated what I sincerely believed, based on the available evidence. I was wrong, but I was honest.” People will respect honesty and sincerity, even if you’re mistaken. They won’t be so quick to forgive someone they feel overstated their case, misled them, and cost them money as a result.
When it comes to Letters of Interest, the best way to do this, I think, is just to let people read the Letters of Interest; include them in your business plan; and just let prospective investors and the like read them in the context of the rest of your business plan. Then, they can interpret what’s in front of them for themselves without you needing to say anything (which might expose you to legal liability).
5. Remember, Everything Is Tentative Until a Contract Is Signed.
In the early stages of a start-up, circumstances are often ephemeral, the winds of fate mercurial; as such, you don’t want to be rigid in your approach to problem-solving, communication, or team building. Maybe you think someone’s going to work out because they look great on paper, but they end up being impossible to work with because they’re an egomaniac, an eccentric who creeps out your customers, or they’re just not comfortable taking the kinds of risks required of successful entrepreneurs. Until a Contract is signed, treat every situation as if it could go 180° from your expectations at any moment. In short, expect the unexpected. With regard to Letters of Interest, this means understanding that they are non-binding, and that someone might state they’re interested one day, and then decide the next they are not. That’s okay. Don’t wig out. There are a lot of fish in the sea, and so on…
Final Thoughts on Letters of Interest
In my opinion, talking about the ephemeral pre-formation stages of a business and all the legal liabilities which may pertain to them is of dubious value. If no one but you has any skin in the game, your most important obligation is just to be clear, honest, and reasonable. The person whose question I answered may or may not have even had a business plan. When one is unaware how they could tell a prospective investor about people who want to be involved in a business, I have to deduce a business plan is probably not something they have. Certainly, they’re aware of potential legal liability, but they appear to be getting the cart before the horse.
First, focus on what you’re doing. Get a plan down on paper. Collect objectively verifiable documentation, such as Letters of Interest, from people who want to be involved. Then, worry about your disclosures to prospective investors, once you’ve got a business plan together. These kinds of questions throw into stark relief the urgent need most people have for General Counsel, even at the initial formation stages of a start-up company.
Get support. Get guidance. Get a BAIL Team together. Make sure you include a lawyer and an accountant in the planning for your venture. For successful, wealthy professionals, this information is obvious. For the guy with a great idea and practically no business education or experience, this is a revelation. Whichever you are, we want to hear from you. Reach out to us, and see how easy and valuable General Counsel for your business can be!
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