The unique nature of a tech acquisition means the Heads of Terms (or Letter of Intent) must be meticulously crafted to reflect what truly matters.

A Seller’s Guide to Heads of Terms in Software M&A

Callum Ritchie August 20, 2025

For a software company founder, the sale of your business is not just a financial transaction -it’s the culmination of countless hours spent on product development, scaling user bases, and building a unique technology stack. The value of your company lies not in physical assets, but in the intangible power of your intellectual property, source code, and customer data.

This unique nature of a tech acquisition means the Heads of Terms (or Letter of Intent) must be meticulously crafted to reflect what truly matters. At The Jonathan Lea Network, we help software entrepreneurs navigate this critical first step. This guide goes beyond the basics to provide a highly specific, seller-focused deep dive into what a software company founder must scrutinise in the Heads of Terms.

What are Heads of Terms and Why Are They So Crucial?

The Heads of Terms is a non-binding document that outlines the key commercial and legal principles of a proposed acquisition. While most clauses are “subject to contract,” certain provisions are legally binding from day one. Its purpose is to demonstrate a serious intent to transact, allowing both parties to invest significant time and resources into due diligence with a clear understanding of the deal’s framework. The Heads of Terms is also where a buyer will first seek assurances regarding the core assets of your business: your technology and data.

For a founder of the software company, the Heads of Terms is your opportunity to:

Lock in Valuation: Firmly establish the headline purchase price and payment structure before the buyer has spent months on due diligence, which could give them an excuse to chip away at the price.
Control the Process: Define the exclusivity period, confidentiality obligations and the timeline for due diligence, giving you control over the pace of the transaction.
Identify Potential Deal Breakers: Flush out any fundamental disagreements with the buyer early on, before incurring substantial legal and advisory fees.
Establish IP Ownership: Clearly stating that you have clear title to all code and technology.
Addressing Data Compliance: Committing to representations about your data security and privacy practices.

Deconstructing a Software-Specific Heads of Terms

A typical Heads of Terms for a software M&A deal will include the following key sections, each with a crucial perspective for the seller.

1 Transaction Structure: The Foundation of the Deal

This section will define whether the buyer is proposing a share sale or an asset sale. This is not a minor detail – it has significant legal and tax implications for you as the seller.

Share Sale: The buyer acquires your entire company by purchasing all of its shares. From a seller’s standpoint, this is often the preferred route as it is generally cleaner and simpler. The company’s legal identity remains intact and all assets and liabilities transfer with it.
Asset Sale: The buyer selectively purchases specific assets, such as your software IP, customer contracts and domain names. The company itself remains with you, along with any liabilities not explicitly transferred. This structure is often favoured by buyers seeking to avoid legacy issues, but it can be more complex for a seller to manage, with potential tax disadvantages. The Heads of Terms should clearly state which structure is being proposed so you can seek appropriate legal and tax advice immediately.

2. The Purchase Price and Consideration

This is the heart of the document, detailing how you will be paid. The headline valuation can be a mix of:

Cash at Completion: A straightforward payment on the day the deal closes.
Earn-Outs: If the deal includes an earn-out, its metrics will be highly specific to your business model. Be prepared to negotiate these from a position of strength.
Recurring Revenue: For SaaS companies, key metrics include Monthly Recurring Revenue or Annual Recurring Revenue. The Heads of Terms should clearly define how this revenue is calculated and whether it includes one-off payments.
Retention and Churn: The buyer may tie an earn-out to a low churn rate or high customer retention, as these metrics are indicative of a healthy business.
User Engagement: For consumer-facing apps, metrics like Daily Active Users or Monthly Active Users might be used.
Share Consideration: You receive shares in the acquiring company. The document should state the valuation of these shares and any lock-up period during which you cannot sell them.

3. Warranties, Indemnities, and Seller Liability

While the detailed provisions will be in the final Purchase Agreement, the Heads of Terms will introduce the concept of seller warranties and indemnities. This section is a crucial preview of your potential personal liability.

Warranties: These are statements of fact about your company’s condition, such as the ownership of its IP, the accuracy of its financial records and the status of its contracts. A breach of a warranty can lead to a claim from the buyer.
Indemnities: An indemnity is a promise to compensate the buyer for specific, pre-agreed losses (e.g., a specific legal dispute). The Heads of Terms should propose key limitations on your liability, such as a cap on the total amount you can be liable for, and a time limit after which the warranties expire. As a seller, you must aim for a low cap and a short time limit.
Source Code Ownership: The buyer will want a warranty that your company owns 100% of the source code, including all copyrights, and that no third parties have any rights or claims over it. This is your cue to ensure your internal code ownership and all freelancer or contractor agreements are watertight.
Open-Source Software Disclosure: The buyer will likely demand a warranty that all Open-Source Software used in your product is in full compliance with its license terms. They will be particularly concerned with “copyleft” licenses (e.g., GPL), which could force you to open-source your proprietary code. The Heads of Terms is where the buyer will seek the provision of a full inventory of all Open-Source Software and a warranty that it poses no risk to the company’s IP.
Third-Party Infringement: You will be also likely be asked to warrant that your software does not infringe on any third-party patents, copyrights, or other IP. This is a significant area of risk for sellers, and you should ensure the Heads of Terms proposes reasonable limits on your liability for such claims.

4. The Legally Binding Provisions: Your Commitments

While most of the document is non-binding, these clauses are not to be taken lightly.

Exclusivity/No-Shop Clause: This is arguably the most significant risk for a seller. You agree not to solicit or negotiate with other potential buyers for a specific period (typically 60-90 days). This gives the buyer a clear runway to complete due diligence but takes you off the market. It is vital to be confident in the buyer’s ability to transact before agreeing to this clause.
Confidentiality: This reaffirms your obligation to keep the deal and all shared information confidential. It is your protection against a failed deal damaging your business’s reputation and employee morale.
Data Privacy and Security

For a SaaS or data-driven business, customer data is a primary asset. However, with regulations like GDPR, it is also a source of significant risk.

Data Compliance: The Heads of Terms will introduce the seller’s obligation to warrant compliance with all applicable data privacy laws.
Security Breaches: You may be asked to warrant that the company has not suffered any material data security breaches. A buyer will use due diligence to verify this with a security audit.
Post-Closing Integration and Key Personnel

The buyer’s intention for your technology and team will be previewed here.

Founder’s Role: The Heads of Terms will define the roles and responsibilities of the founders post-acquisition. For a CTO or technical founder, this may involve a significant role in the integration of the software with the buyer’s existing platform.
Non-Compete and Non-Solicitation: These clauses are particularly strict in the tech world. The Heads of Terms will outline their duration and scope.

Negotiation Strategies for Software Founders

Refuse Vague Earn-Outs: If an earn-out is proposed, negotiate for clear, objective and realistic performance metrics. Push back on any subjective criteria and ensure you have a say in the company’s operations during the earn-out period to protect your interests.
Shorten the Exclusivity Period: While the buyer will want a long exclusivity period, a shorter one (e.g., 45 days with an option to extend) protects you if the buyer’s due diligence stalls.
Negotiate Your Liability Cap: The Heads of Terms is where you first negotiate the cap on your indemnity liability. Aim for a cap that is a small percentage of the total purchase price, not 100%. Ensure any indemnity for data breaches is reasonable and capped at a realistic level, not an open-ended commitment. Similarly, push for a short “survival period” for warranties.
Confirm the Employee Plan: Get clarity on the buyer’s intentions for key personnel, non-compete clauses and any new employment contracts or retention bonuses. This demonstrates you are looking after your team’s best interests.

Get Expert Legal Guidance for your Sale

Your software company is the product of your intellect and your team’s hard work. The Heads of Terms is your first chance to ensure that value is properly recognised and protected. Getting it right requires a deep understanding of both the law and the technology industry.

For tailored legal advice on selling your software company and to ensure your Heads of Terms is robust and favourable, contact the specialist team at The Jonathan Lea Network. We provide clear, strategic guidance to help you navigate this complex process and secure the best possible outcome.

How We Can Help

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT to £350 plus VAT* depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.