As a startup raising capital, you will most likely look to raise capital from more than one investor. While you are completing your raise, you will need to negotiate the terms of the investment with your investors. When you have multiple investors, the negotiation process can be difficult due to the number of parties involved. To facilitate this process, startups will usually confine their discussions and negotiate terms with one 'lead investor'. The lead investor is the investor who initially agrees to the key terms of the deal with the company. They become the representative of all other investors who participate in the round. As a result, it is important to understand the role the lead investor plays when capital raising. This article will explain the role the lead investor plays. It will also consider why they are important and how best to negotiate with a lead investor.
What Is a Lead Investor?
A lead investor is an investor that sets the initial key terms of the capital raise, usually by issuing or signing a term sheet. They are the primary investor and negotiate the transaction documents to ensure they reflect the agreed commercial terms. The terms that you negotiate with the lead investor will typically apply to all the investors participating in the round.
Usually, a lead investor will be someone who is familiar with capital raises and is a sophisticated investor. They are often the largest investor in the round in terms of value. Where a venture capital firm is involved in a raise, the firm will usually act as the lead investor. The venture capital firm may also have a larger network of investors that invest through the firm. The firm will act as a point of contact for other network investors and negotiate the contract.
Why Are They Important?
Once the lead investor is on board, you will find it easier to onboard additional investors. This is because other prospective investors will view the lead investor's commitment as an endorsement of the opportunity.
The lead investor will be highly involved in the round and will have a significant amount of responsibility throughout the capital raise process. They will be particularly active when negotiating the round.
Likewise, the lead investor typically instructs the lawyer advising the investment parties. Absent one, it is impractical to negotiate the terms of the financing.
Once you agree on the documents with the lead investor, the other investors usually undertake a quick review to ensure that everything is per the initial key terms in the term sheet.
How to Negotiate With a Lead Investor
You would negotiate with a lead investor as you would with any normal investor. The only difference is that the lead investor represents all the other investors. The negotiation process for your startup negotiations remains the same.
Key Takeaways
When your startup is raising capital from multiple investors in a round, one of the investors, often the largest investor, will act as the lead investor. It is important to have a lead investor when capital raising from multiple investors. The lead investor will set the key terms of the deal with your startup and facilitate the negotiation process by negotiating the transaction documents on behalf of all investors.
