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A letter of intent to purchase stock is a written statement of the main terms on which a buyer expects to acquire shares in a company from an existing shareholder. It names the shares, the price, and what has to happen before the transfer.
This differs from buying a business outright. Here the seller is a shareholder rather than the company itself, the company carries on as it is, and what changes is who sits on the share register.
It also differs from an investment. No new money enters the company; the buyer pays the seller, and the company’s own cash position is unaffected by the transaction.
Buyers usually send one after early diligence. The seller negotiates, both sign, and lawyers draft the share purchase agreement from an agreed starting point.
Reach for a letter of intent to purchase stock when the terms are settled enough to be written down but the definitive agreement is some way off. Common situations include:
Small transfers between people who already have a shareholder agreement in place may not need one. Once the amount is significant, or the stake changes who controls the company, writing the terms down early is worth the effort.
A letter of intent to purchase stock should fit on one or two pages and be precise about the shares themselves.
Name the buyer and the selling shareholder in full, and identify the company whose shares are being sold.
State the number of shares, the class, and what percentage of the issued share capital they represent. Vagueness here causes most of the later disputes.
Give the price per share and the total, and say how it will be paid: cash at completion, instalments, or an amount held back.
Note briefly how the price was arrived at, particularly where an independent valuation or a formula in an existing agreement applies.
List what must happen first: due diligence, board or shareholder consents, waivers of pre-emption rights, and any regulatory clearance.
Say what comes with them, including voting rights, dividend entitlement, and any board seat.
Set out any no-shop period, confidentiality, and a date the terms lapse.
Shares in a private company are rarely freely transferable, and this is where these deals most often stall.
Read the articles of association and any shareholders’ agreement before you go far. They commonly contain pre-emption rights giving existing shareholders first refusal, board approval requirements for transfers, and drag-along or tag-along provisions that pull other shareholders into the deal.
Employee shares carry their own layer. Vesting schedules, company buyback rights, and restrictions tied to leaving are all common, and an employee may hold less than they think they can sell.
Tip: Ask the seller for the current articles, the shareholders’ agreement, and an up-to-date cap table at the outset. If a pre-emption process has to run, it takes weeks, and finding that out late resets your timetable entirely.
A letter of intent to purchase stock comes together quickly once the commercial terms are agreed. Document Genius walks you through each section with simple questions.
Open with the date and name the buyer, the selling shareholder, and the company.
Number, class, and percentage of issued capital.
Price per share, total consideration, and the payment mechanics.
Diligence, consents, waivers, and approvals, without exception.
Say plainly which clauses bind and which do not.
Date it, sign it, and pass it to the lawyers drafting the share purchase agreement. Start yours now and have it ready today.
Most of the document is written to be non-binding, so neither side has to complete. A small number of clauses usually work differently.
Clauses commonly intended to bind:
Label the binding clauses explicitly. Whether any of them holds up depends on the wording and on where the parties are, so this is not a place for ambiguity.
Buying and selling shares can be a regulated activity, and the tax consequences for a selling shareholder are often significant. Nothing here is legal, tax, or investment advice. Have a corporate lawyer review the terms and an accountant review the tax position before anyone signs.
How much of the company the shares represent changes the deal more than the price does.
A minority holding usually comes with limited influence. The buyer cannot direct the company, may be unable to force a dividend or a sale, and can find the stake difficult to sell on. Terms addressing information rights, board representation, or an exit mechanism are worth raising in the letter rather than after.
A stake that crosses a control threshold changes the character of the transaction entirely. Consent requirements, change-of-control provisions in the company’s contracts, and regulatory notifications may all be triggered, and those take time to work through.
Ask what the shares actually carry. Two holdings of the same size in the same company can differ substantially if one class votes and the other does not, or if one carries a preference on a sale.
Tip: Where the buyer is taking a minority position, agree in the letter what information they will receive and how often. It is a straightforward ask at this stage and an awkward one once the deal has closed.
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