How startup acquisitions work: from LOI to close

Most startup sales follow the same path: early conversations, a letter of intent, due diligence, a purchase agreement and then closing. A small deal can move through every step in six weeks; a large one with regulatory reviews can take a year or more. Knowing the sequence helps founders plan the team's time and avoid surprises late in the process.

Who is involved

On the seller's side, the core group is usually the founders, the board, a corporate lawyer and, for larger deals, an M&A adviser or banker. On the buyer's side, a corporate development team runs the process, with input from the product group that will own the startup, finance, legal, security and HR. Keeping the circle small on the seller's side reduces the risk of leaks unsettling employees and customers.

1. First conversations

Many acquisitions start with a partnership or an informal approach from a corporate development team. Others start when founders hire an adviser to run a process and contact likely buyers. A competitive process with several interested buyers usually produces better terms than a single bilateral conversation.

2. The letter of intent

The letter of intent (LOI), or term sheet, sets out the headline price, how it will be paid (cash, shares or a mix), any earn-out, the treatment of employee options and the main conditions. It is mostly non-binding, but it usually includes a binding exclusivity period of 30 to 90 days during which the startup agrees not to talk to other buyers. Founders should negotiate the important points here, because leverage drops once exclusivity starts.

3. Due diligence

During due diligence the buyer checks everything the price depends on: financial statements, customer contracts, intellectual property ownership, employment agreements, security practices, litigation and the cap table. Sellers share these documents in a virtual data room. A secure, modern data room such as Papermark lets the startup control who sees each folder, add watermarks and see which documents each buyer has actually read, which helps answer questions before they are asked.

Problems found in diligence rarely kill a deal outright, but they often lead to a lower price, a larger escrow or specific indemnities.

4. The purchase agreement

The definitive agreement turns the LOI into binding terms. It contains representations and warranties about the business, indemnities if those turn out to be wrong, an escrow or holdback to cover claims, conditions to closing and the mechanics of paying shareholders. The board and the required majority of shareholders then approve the deal.

5. Signing, approvals and closing

Small deals often sign and close on the same day. Larger ones sign first and close later, after antitrust clearance, foreign-investment reviews or other approvals. At closing the money moves: investors and common shareholders are paid according to the liquidation preferences in the company's charter, and employees receive any cash-out of their options plus their new packages from the buyer.

Our exit tracker records the status of each deal as it moves from announced to completed, and the top startup acquisitions of 2026 ranks the biggest by disclosed price.

Common pitfalls

Deals most often slip on things that were knowable early: unclear ownership of code written by contractors, missing employee invention assignments, messy cap tables, unpaid sales taxes or customer contracts that forbid assignment. Cleaning these up before talking to buyers shortens diligence and protects the price.

Running the business well during the process matters just as much. Buyers watch monthly numbers closely, and a weak quarter between the letter of intent and signing is one of the most common reasons for a price cut.