What is a lead investor?
A lead investor is an individual or organisation who takes on the responsibility of the setting the terms of the investment deal. This often means they are putting in the largest share of the total amount being raised and therefore want to lead the negotiations.
Most rounds with more than one investor will need a “lead investor”. If your round has one investor, they are by default, the lead investor.
Lead investors are often the most difficult to find, as it means they have extra responsibilities – which few investors are willing to take on in a group investment scenario unless they are experienced.
What does a lead investor do?
The lead investor is responsible for setting the terms of the deal, doing due diligence, and negotiating with you. They agree on things like the valuation (and therefore share price), the heads of terms, and the legal agreements for which all other investors must agree (the term often used for this is that the other investors “follow on”).
You are also likely to find that many angel investors are more confident in investing if a lead investor is on board. This gives them the confidence that the deal will be a good one. The more experienced the lead investor, the more likely you are to attract other less experienced investors who are willing to follow on.
The lead investor usually puts in the most money, but not always, as they may be a smaller stakeholder but have the experience and willingness to lead. Your round could be led by an individual angel or a professional fund (funds are usually much more willing to lead).
Do you need to have a lead investor for your investment round?
Not necessarily. You can effectively lead the round yourself and negotiate the terms individually with each investor. However, these terms need to end up the same with every investor (you wouldn’t be able to agree to a different valuation with different investors, for example, nor would you end up with different shareholder agreements for each).
This means it becomes your responsibility to get all investors on the same page and work on a deal they can agree to.
If you find someone who is willing to be the lead investor early on, that is great news! Having a lead investor usually means you have someone with experience willing to invest, which will give you credibility with other investors. Be sure to name-drop who your lead investor is in future pitches!
Do lead investors get better terms?
No. Lead investors invest on the same legal terms as everyone else. The benefit for the lead investors is that they get to set the terms that work best for them, and they are also more in control of the due diligence. This suits some investors who are more detail focused on their approach and like to be more hands-on.
It can also provide some other benefits. For example, it can help the investor improve their reputation in the industry, so they get a better deal flow of investment opportunities. It’s also common for the lead investor to request a board seat with the startup to have input on the company’s direction (although they wouldn’t have any control over decisions other than anything agreed upon in the shareholder’s agreement).
How to find a lead investor
It can take some time to find a lead investor. In our experience, most investors are more willing to follow on, and few want to lead the round. Many rounds lose momentum or even fail because founders cannot find a lead investor.
You may also find yourself in a position where you have all the money you need committed, but no lead investor – in which case, there are a few options available to help you find a lead investor and close your round:
1. Approach a fund
Make it clear that you already have a good proportion of your round committed and are now seeking a lead investor to close the round. Most funds are happy to lead a round, and you can quickly gain their interest once you already have traction in your round and investors waiting to follow on.
2. Sweet talk your current investors
Use your powers of persuasion to change one of your current investors’ minds. Explain how you are ready to close your round and are just waiting to find a lead investor. Before you approach your current investors, be sure to study how investment rounds are closed, speak to a legal team with some experience in doing the legals for a funding round, create a solid data room and due diligence pack, and do everything you can to suggest to your investors you will make them leading the round as painless as possible.
3. Ask your current investors for intros to a lead investor
Investors rarely invest in isolation. If they have a portfolio of investments, they also have connections with lead investors who structured the deals on those rounds. Ask your committed investors if they know of any investors that might be willing to get involved and take the place of lead investor – especially given the round is now in a position to close.
Once you find a lead investor, make sure that you are clear about what their level of financial commitment is going to be in the round, so you are all on the same page – just like you would with any other investor. And don’t forget to do your due diligence on the lead investor – it’s easy to get caught up in the excitement of finding a lead investor that you forget to check out their credibility, just as you would with all your follow-on investors.