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To The Letter

The path to a successful IPO starts with the crucial letter of intent.

In the world of initial public offerings for emerging entrepreneurial companies, the six most beautiful words in the universe are "We want to do your deal." Wow, what a rush. But the thrill of bagging the quarry quickly fades as the enormity of the next task comes into view: negotiating the letter of intent.

By definition, the letter of intent is the first legal document sent to a company from its underwriter setting forth the parameters of the deal, according to Nicholas Moceri, vice president of investment banking in the Providence, Rhode Island, office of Schneider Securities Inc. Moceri's firm specializes in raising capital for fast-growing technology companies primarily in the New England area. With most venture capitalists pouring money into established businesses in their existing portfolios, Moceri says, there's a shortage of early-stage capital that presents huge opportunities for investment banking companies like Schneider Securities.

Still, no matter how big the opportunities, after the hand-shaking, the back-patting, the dinners, the breakfasts, the presentations and the facility tours, the letter of intent is where the rubber hits the road. "The letter spells out what each party will do," says Moceri, "and also acts as a blueprint or 'constitution' for the deal."

But just as the U.S. Constitution was hammered out at the Constitutional Convention over a period of weeks in 1787, so, too, is a letter of intent. And in this sense, the letter of intent is more than a document, says Moceri: "It's the process by which the deal is negotiated."

David R. Evanson, a writer and consultant, is a principal of Financial Communication Associates in Ardmore, Pennsylvania.

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This article was originally published in the January 1996 print edition of Entrepreneur with the headline: To The Letter.

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