Contracts beat LOIs for early customers

In the early stages of building your company, every customer interaction, commitment, and signal of market demand feels vital. Founders often celebrate non-binding Letters of Intent (LOIs) as wins—and they are, to an extent. But there’s a stark difference between an LOI and a contract, and understanding this difference could transform the trajectory of your go-to-market efforts and your ability to raise capital.

The Pitfalls of Non-Binding LOIs

LOIs can be deceptive. They can create a false sense of security, leading you to dedicate time, resources, and focus to a partner or customer who isn’t truly invested in solving their problem with your solution. Non-binding LOIs are just that: non-binding. They signal interest but don’t obligate the other party to take action. They’re a handshake—not a commitment.

The problem arises when you’re lulled into believing that an LOI is as good as a signed contract. When it’s time for the customer to move from LOI to actually buying, you’ll often find yourself re-selling—essentially starting the sales process all over again. The effort to “convince” someone a second time can be draining, unpredictable, and demoralizing. Perhaps your product is the best thing ever, and they quickly sign up. More likely, there will be one or two features they'd like to see, one or two loose wires they want cleaned up, and all of this will result in delays–or worse. Investors—particularly those who’ve seen this movie before—will value LOIs much less than actual contracts.

Why Contracts Matter

Contracts, even if they include an “out,” change the dynamic entirely. Structuring a contract with a termination-for-convenience clause allows customers to exit the agreement, but the default shifts from “not a customer” to “customer.” This psychological and operational shift is powerful. A contract signals commitment—a readiness to take action. It’s much harder for someone to walk away from a signed contract than an LOI, even if the exit is straightforward.

For investors, contracts—even with outs—are significantly more valuable. They demonstrate that you’ve not only generated interest but also converted that interest into tangible, revenue-generating commitments. This is especially critical when you’re raising a funding round. Investors look for signals of traction and de-risked execution, and contracts are one of the strongest forms of validation you can provide.

The Path to Structuring Contracts with Outs

Building contracts with a termination-for-convenience clause is straightforward. It allows your customer to walk away if necessary, addressing their concerns about flexibility while still committing them to a real agreement. Structuring contracts this way gives you:

1. Clear ARR: Even if it’s conditional, ARR from signed contracts gives you a solid foundation to measure and communicate your growth. Many still raise money based on this, even if there is a chance of the customer churning.

2. Customer Confidence: A signed contract provides clarity—you know who’s truly committed, allowing you to prioritize their needs and feedback.

3. Fundraising Leverage: Contracts signal a higher level of market validation to investors, giving you a stronger position to raise capital.

Price like an LOI

I would never advise "free" as a price, but for your first ~5 customers you might need to be flexible. Here are ways you can get value even if you aren't extracting cash at the start.

1. Logo, case study and reference rights. If the point of giving the product away at no charge is to be able to use them as a reference or put their logo on your website–add that to the contract. That is value to you.

2. Pay later. Structure your agreement so that it is binding and revenue now, but they pay later. For example, quarterly payments in arrears with a 90 day out means they can have ~60 days of using the product before they get an invoice, and a further 30 to decide whether or not to cancel. So they're not out of pocket until they've seen it in action–but, they're a customer the whole time. 

3. Incentivize paying now. If your prospect has indicated a willingness to pay $100k/year but a reluctance to pay anything until they've tried it, you might offer a significant incentive to pay something now–for example, pay $50k up front for the year, or $25k/quarter. 

4. Separate services revenue. Sometimes companies have budget allocated for services (consulting, implementation, etc.). If you can charge for this–do! While some investors frown on this kind of revenue, it's still cash and it still pays bills. It also shows commitment. Many successful companies were built on this kind of revenue early on (Cloudera, PROS, many others). 

Conclusion

While LOIs are better than nothing, they’re not ideal. Prioritize converting interest into contracts. By making small adjustments to the way you structure agreements, you can shift the default to “customer,” demonstrate true traction, and secure the confidence and resources you need to scale. Contracts don’t just move the needle for your business—they redefine what’s possible for your growth.