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Why You Shouldn’t Skip a Memorandum of Understanding

Publications / Aug 06, 2018

Call it a Memorandum of Understanding (“MOU”), Term Sheet, Summary of Terms or any other title, but don’t skip it.

Too often parties are eager to “close the deal” and to our suggestion to start with an MOU say they don’t want to waste any time and go right ahead with a full-blown agreement.Whether it’s an investment agreement, license agreement, services agreement, mutual co-operation agreement or any other agreement, it is advisable to start with detailed understandings of the principles of the engagement, and here are five reasons why:

  1. An MOU can be of 1-2 pages which specify the main principles of the engagement. Unlike a full definitive agreement which, depends on the complexity of the engagement, can be of many more and will require time and effort for both parties to review and mark.
  2. Very often, even when the parties think that the principal terms of their engagement are known to them, its only when those are drafted in written that they comprehend the essence of the engagement.  In other words, an MOU helps getting everyone on the same page (even within the organization of one party), which, at the beginning of a cooperation is invaluable. If the parties don’t agree to those – there will not be an engagement.
  3. An MOU helps both parties to define what each of them brings to the table and what it gets in return. Its also helpful in understanding whether the return is worth the contribution.
  4. An MOU is very helpful when the parties need to define core details which require thought, negotiation and getting the input of one another such as: milestones, schedule, investment amount, instalments, burn rate, working capital etc. Very often a deal can explode when an agreement on these issues is not reached.
  5. When the legal is brought in, there are often questions that the parties didn’t think of before that and an MOU will help bringing them up. For example, in agreements that involve a mutual R&D a core issue is always the question of ownership of the created IP – sometimes the parties either don’t think of it in advance or its clear to one party that the ownership will belong to it, when something else might be clear to the other party. When these questions are brought up, they turn to be an issue that lays in the very essence of the engagement.

These are just five examples for how this short and simple tool can help in a more efficient and thorough process and raises the odds that the negotiation will be completed in a legally binding agreement of the engagement. Another valuable advantage is that this encourages a good spirit process between the parties in the negotiation stage, given the fact that they are not required to drill down to all the details which will appear in the definitive agreement that will follow the MOU.

For further information please contact Keren Shmueli.