What is a Memorandum Of Understanding (MOU)?

A Memorandum Of Understanding is a written document that outlines the relationship between two or more parties. The parties concerned will often define the terms of that relationship, including the parties’ responsibilities and requirements. A MOU drafted for start-up co-founders will often include the objective and purpose of the founders’ project, their managerial roles, their initial monetary contributions, and so forth.

When should start-up co-founders ask for a MOU?

An MOU should generally be entered into by co-founders during the initial steps of their venture.  Founders considering a MOU should have a general objective for their project. At that stage, a MOU is preferable over a standard shareholder agreement, for two main reasons. First, drafting a MoU is almost always cheaper and faster than drafting a shareholder agreement. Also, a MOU is generally non-binding.

Examples:

MOU: Binding vs Non-Binding

Memoranda of Understanding are generally non-binding. Why? First, when a MOU is considered, the founders may not know much about one another. As the start-up grows, new matters, which weren’t considered in the MOU, will inevitably arise such as the addition of an employee, an investment by a sophisticated investor, or a material change in the business operations. A MOU, if drafted before those events, might not be flexible enough to accommodate the new situation. Hence, MOU are generally non-binding and will often include a non-binding clause, like the following:

 “This Memorandum of Understanding is not intended to create any legally binding obligations on either Founder but, rather, is intended to facilitate the Project.”

MOUs: Binding In Some Circumstances

If the founders of a start-up are in desperate need of a binding agreement (under the pressure of investors, to legitimize the company, to conclude a deal, etc.), they should consider a binding MoU. That memorandum of understanding should be binding, but subject to a sunset clause. That sunset clause could be the execution of a deal, the addition of an investor, etc. Once that landmark is reached, the parties should be under the obligation to negotiate and execute a final agreement, such as a shareholders’ agreement. 

Advantages and Disadvantages of an MOU

Advantages

• It can help to avoid misunderstandings and disputes by clearly defining the roles and responsibilities of each party,
• It can provide a framework for resolving disagreements. By clearly stating what each party expects from the other,
•  The MOU provides a blueprint for any agreement, whether both parties want to settle it down the road. 

Disadvantages

• It can be difficult to enforce, and if one party breaches the agreement, the other party may not have any legal recourse. 
• The main drawback of consent forms is that they are not legally binding. Sometimes this can be advantageous, but neither party is obliged to do what they said in their MOU, so they can just walk away or change their expectation. 

MOU for partnership agreement between two organizations

An MOU should outline what each organization agrees to contribute to a partnership, a timeframe for delivering the desired outcomes, details of exactly how each party will collaborate (e.g., regular in-person meeting, conference calls, written approval of all activities by both parties), and how the parties will authorize and pay for any costs incurred in delivering the desired outcomes.

MOUs are like contracts that define the way two organizations will work together. While MOUs are technically legally binding, consider these documents as a tool to facilitate partnership and ensure a smooth working relationship between two organizations. Given the legal nature of the documents, however, it’s wise to have a legal representative review the language included in the MOU before it is signed.

A well-executed MOU includes the following:

• Details about specific projects and initiatives on which the organizations will collaborate, including the scope of projects and the length of time the projects will last.
• Information detailing how costs associated with joint efforts will be authorized and paid for.
• Guidelines defining the use of each organization’s logo and name in joint materials such as press releases, fact sheets, brochures, websites. For example, does an organization have branding guidelines that must be followed when creating joint materials?
• Guidelines defining ownership of jointly developed materials and use of those materials after the MOU has expired.
• Language outlining if and how partnership will be announced to the public and/or media.
• The length of time that the MOU will be valid — often known as a period of performance — that includes the date the MOU takes effect and when it ends. Include language that leaves opportunity to renew the agreement. Also, include language so that either party can end the agreement for any reason within a 30-day period based on written notification.
• A point of contact for each organization who will facilitate collaboration.
• Signatures from leadership within the organizations, such as the executive director, board president, or other designated decisionmaker, and the date the document was signed.

FAQs

Q: Is an MOU Legally Binding?

Ans:

An MOU may be legally binding if it meets all the requirements of a contract. A contract is a legally binding agreement between two or more parties that creates obligations that the parties are obligated to fulfil. For an MOU to be legally binding, it must contain all of the essential elements of a contract, including offer, acceptance, consideration, and mutual intention to be bound.

Q: What Is the Difference Between an MOU and MOA?

Ans:

An MOU is a Memorandum of Understanding, while an MOA is a Memorandum of Agreement. Both are legally binding documents that outline the terms and conditions of a partnership or other business arrangement. The main difference between the two is that an MOU is typically more general while an MOA is more specific and detailed. An MOU may be used to establish an agreement between two parties in which the terms are more broadly written and less detailed than in an MOA.

Q: Can an MOU be changed?

Ans:

Yes, an MOU can be changed. The process for changing an MOU depends on the agreement reached between the parties. An MOU is a nonbinding agreement, so the parties can decide to change the terms of the agreement at any time. However, it is best to put any changes in writing and have all parties sign the revised agreement. This will help avoid any misunderstandings about the new terms of the agreement.

Q: What should be included in an MOU?

Ans:

An MOU should include a description of the business arrangement, the roles and each party's roles and responsibilities, and the MOU's term relevant information. The MOU should be signed by both parties and dated.

Q: What are the benefits of an MOU?

Ans:

An MOU can provide clarity and certainty to the parties involved in a business arrangement. It can help prevent misunderstandings and disagreements by setting forth the expectations each party soles and responsibilities of each party serve as a contract between the parties, which can be enforced in court if necessary.

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Sources: Business Venture Clinic, American Psychological Association Services, Khatabook