How a Memorandum of Understanding (MoU) Can Help Your Business
By Maeva Slotine, published: 2023-09-13
An MoU is a formal agreement between two or more parties, outlining the terms and details of an understanding, including each party’s requirements and responsibilities.
What is a MoU in business?
A Memorandum of Understanding is a milestone towards the realisation of a project with the input of different parties and is used at the Intention Stage of a project.
While it is not legally binding like a contract, an MOU is more formal than a handshake or verbal agreement and serves as a written record of what has been agreed upon.
Does my startup need an MoU?
A startup might need a Memorandum of Understanding (MoU) for several reasons, as it clarifies relationships, expectations, and responsibilities between parties before entering into more formal and legally binding agreements.
Here are some scenarios where a startup might find an MoU beneficial:
Partnerships and collaborations
Startups often form partnerships with other companies, vendors, or service providers. An MoU can outline the general terms of the partnership, such as goals, project scope, responsibilities, and other logistical details.
Pilot programs or beta testing
Before a full launch, startups may engage in pilot programs or beta tests with a limited user group or another business. An MoU can specify the terms of this engagement, which may involve data sharing, timelines, and responsibilities of each party.
Funding and investments
Startups seeking investment may use an MoU to outline preliminary terms with potential investors, including clauses related to equity, valuation, and the use of funds. While not legally binding, the MoU sets the stage for more formal agreements like term sheets or investment contracts.
An MoU can clarify roles, responsibilities, and equity stakes for all parties involved in a joint venture, which is particularly useful when two or more startups collaborate on a specific project or combine resources to penetrate a market.
Licensing and intellectual property
If a startup is licensing its technology to another company (or vice versa), an MoU can lay out the terms of the licensing agreement, including any intellectual property rights, fees, royalties, and usage restrictions.
Startups often rely on external vendors for various services such as software, raw materials, or manufacturing. An MoU can outline the relationship before a complete sale of goods agreement is executed.
During acquisitions or partnerships, an MoU can outline the terms and scope of the due diligence process, including what kind of information will be shared, who will have access to it, and how confidential information will be handled.
Although MoUs are generally not as legally binding as contracts, they may contain enforceable clauses, such as an NDA or non-compete agreements. This offers some level of legal protection for both parties involved.
Credibility and trust
An MoU can offer credibility when a startup deals with larger, more established companies. It demonstrates a level of seriousness and commitment to the engagement.
MoUs provide more flexibility than formal contracts and are usually easier to amend to make them more adaptable to startup ventures’ fast-paced, ever-changing nature.
Key elements of an MoU
A comprehensive MoU should set a clear roadmap for its parties on how they will move from the Intention Stage to the Contract Stage.
The parties may only be able to move on from the Intention Stage with an MoU.
A comprehensive MoU should address the following questions:
1. Presentation of each party;
2. definition of the project;
3. Contribution to the project in kind or in cash that the other parties expect each party (and agrees) to take responsibility for in the project (e.g. funding, marketing, sourcing, manufacturing, etc.);
4. What needs to be done: Detailed conditions to meet before proceeding to the Contract Stage (e.g. preparation and validation of a business plan by all parties, with a list of questions that need to be addressed);
5. Kick-off event (conditions in 4 completed) or withdrawal event (conditions in 4 not completed); extended stop date (i.e. the latest date agreed by parties to decide to go ahead or not);
6. What is the next stage (see 2nd paragraph of this article);
7. Who will be in charge of having the documents prepared for the Contract Stage;
8. How the preparation of the Contract Stage will be funded (both parties should contribute and be refunded by the company);
9. Structure of JV agreement (details and drafting to be agreed later on good faith, based on market practice to ensure the protection of each party’s interests, including the company):
- repartition of share capital between parties (need to be stated in the MoU);
- number of board members and how many shall be appointed by each party (minimum one, maximum 3-5)(need to be stated in the MoU);
10. set schedule for (i) signing the MoU), (ii) completing the conditions and deciding whether to go ahead with the project or not, (iii) preparing and signing the JV agreement, and (iv) getting started with the project;
Common mistakes in a Memorandum of Understanding
The most common blunders that can occur with an MoU are:
Making the MoU too general so it doesn’t contain provisions where each party formulates in express terms what they need to know from the other parties concerning the project, or it’s far too detailed and has obvious provisions for the shareholder’s agreement.
Too much detail can cause parties to spend time arguing on the finesses of those clauses before the business plan has even been validated.
In the latter, where the MoU contains very detailed provisions for the shareholder’s agreement, those provisions will likely need to be amended later to be workable and achieve a balance between the party’s interests as well as the company’s (which should be a party to the shareholder’s agreement).
If an MOU contains detailed provisions for the shareholder’s agreement, it often stalls the discussion and makes any changes challenging to agree upon.
For this reason, unless parties take professional advice for drafting or negotiating the MoU, it is advised to focus on the parties’ contributions to the project and the structure of the future shareholder’s agreement.
Other important clauses for an MoU
11. reasonable confidentiality provisions;
12. exclusivity clause;
13. termination clause (what happens if at least one party decides to withdraw from the project);
15. standard clause for dispute resolution, including mediation or other alternative dispute resolution methods agreed in advance by the parties.
MoU meaning in business
By addressing the 15 points above in your MoU, you will clearly express the who’s and what’s, eventually determining your decision to commit to the project.
If you address these points in clear terms in the MoU, you will be in clear waters if you want to withdraw from the project or go ahead on different terms.
These confusions, ambiguities, omissions, or even mistakes at the MoU stage lead to misunderstandings with your future partners working on the wrong assumptions, and vice-versa.
Creating an MoU for your business
For this reason, the all-important MoU clearly states what other parties are expected to bring to the table (by you), what they expect you to bring to the table, and what needs to be worked out at this stage (business plan, regulations, etc.).
When negotiating an MoU, it’s crucial to remember it is the last non-binding document before you commit to the project.
Be aware that most clauses in an MoU are expressly qualified as non-binding, and you cannot be ordered by the court to execute them.
But they are a declaration of intention to the other parties, and wrong assumptions can be impossible to overcome as they dent the trust between parties and can lead to the end of the project or a project built on a foundation of sand.