LOI info from Wikipedia (excerpted): LOIs resemble short, written contracts, but are usually in tabular form and not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as those governing non-disclosure, governing law, exclusivity or covenants to negotiate in good faith.

Common purposes of an LOI are:

To allow parties to sketch out fundamental terms quickly before expending substantial resources on negotiating definitive agreements, finalizing due diligence, pursuing third-party approvals and other matters[1]
To declare officially that the parties are currently negotiating, as in a merger or joint venture proposal
To provide safeguards in case a deal collapses during negotiation
To verify certain issues regarding payments made for someone else (e.g., credit card payments)

Potential downsides to using an LOI may include:

The parties may engage in protracted negotiations on only a subset of a deal’s terms
Management time and focus may be diverted
Alternative opportunities may be missed and markets may move against the parties during negotiations
Parties may reduce their lack of a workable deal framework into an LOI, with a hope of making progress later
Public disclosure obligations may be inadvertently triggered
The risk of leaks, exacerbated by the desire of some to tout the LOI to the world, or shop it to other parties