In today's article, we'll explain what a lead investor is, how important they are, what are the responsibilities they can assume and the advantages they have.
When a startup starts raising capital, it usually does so with more than one investor. This is usually a complex process, which takes between 6 and 9 months, depending on the stadium in which the company is located. To facilitate the process of negotiating conditions, and because many investors prefer to play a secondary role and delegate part of their potential functions to renowned investors, it is often the case that startups agree on terms and conditions with a Lead Investor. If the conditions agreed between the startup and the Lead Investor are reasonable and/or “market”, these conditions will be accepted by other investors who want to participate in the round and will set the most important guidelines for the round, such as valuation, the total amount of the round, and the clauses relating to company governance, tag-along, drag-along, preferential liquidation, ratchets (if any), permanence of entrepreneurs, vesting, etc.
What is a Lead Investor?
A Lead Investor is a person, a group of people or an organization, who leads a funding round, meaning that they are willing to make a relevant contribution to the total transaction, and negotiate the terms and conditions of the same. You can also act on behalf of the other investors in the round. They are usually the first person or institution to believe in the startup and offer financial support. Not only does it help the company financially, but it also invests time and experience to ensure that the round is successfully closed. Usually, the Lead Investor invests and represents the rest of the investors before, during and after the funding round. He brings strategic value to the company and is committed to the founders to continue working and believing in the company.
What is the importance of a Lead Investor?
For a startup, negotiating terms with each investor at the same time is impractical, and can lead to endless discussions that make it difficult to close the transaction. It can also be the case of having to negotiate conflicting terms simultaneously with different investors. With the addition of a Lead Investor, these problems are diluted to a certain extent. The transaction documents will only need to be negotiated once. Afterwards, he or the entrepreneur himself will be responsible for transmitting and/or defending the agreed conditions to other investors. Once the documents are agreed with the Lead Investor, the other investors usually carry out a quick review to ensure that everything fits “market” conditions and will not try to renegotiate the key terms already agreed upon.
What are the responsibilities of a Lead Investor?
The specific responsibilities of the Lead Investor are set out in the investment agreement. They usually include the following tasks, among others:
- Order and review a report of due diligence.
- Negotiate the initial conditions of the investment.
- Lead against other investors.
- Help structure future fundraising rounds
- Be part of the Board of Directors.
- Share information and/or presentations with other investors.
What are the advantages of having a Lead Investor?
Among the advantages of having a Lead Investor, we highlight:
- In general, it is usually the person or Venture Capital that contributes the most capital to the company.
- It helps the startup to establish credibility in the market and also among other potential investors, achieving a domino effect and accelerating the closing of more investment.
- They tend to have extensive experience, so they are able to establish metrics, review the company's progress and bring other investors up to date.
- Reduction of time and overall effort to raise capital.
- Including the name of a Lead Investor and the conditions in your pitch-deck improve a startup's chances of successfully conducting a funding round.
Read more: Investment in startups: What should you look for when looking for an investor for your startup? Who is the entrepreneur that investors like the most?
