As a startup raising capital, you will most likely be doing so from more than one investor. Before you finalise and complete the 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 because of the number of parties involved. To facilitate the negotiation 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 for 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 a lead investor plays, why they are important and how you can negotiate with one.

What Is a Lead Investor?

A lead investor is an investor that initially sets the 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 terms. The terms that you negotiate with the lead investor will 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 and experienced investor. They are often, but not necessarily, the largest investor in the round. Where a venture capital firm is involved in a raise, the firm will usually act as the lead investor. The other investors generally trust that the lead investor knows what they are doing and rely on them to negotiate fair terms. 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.

The lead investor will usually engage a lawyer to help them with their review of the transaction documents. The other investors may not engage lawyers as they may be happy to rely on the lead investor’s legal counsel. Doing so ensures that the investors’ rights are protected as a whole. Your startup will usually have to cover the lead investor’s legal fees (but not the other investors’).

Why Are They Important?

If you are raising capital from multiple investors in the same round, you will need a lead investor. Your other investors will need to understand the purpose of the lead investor and be comfortable with them leading the round.

Without a lead investor, it would be impractical, if not nearly impossible, to negotiate the terms of a capital raise. If your startup had to negotiate with multiple investors at the same time, you would end up discussing and covering the same items multiple times. You could also end up having to negotiate conflicting terms simultaneously with different investors. Where you have one lead investor, that investor will be responsible for negotiating the transaction documents in the first instance. 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. They will not seek to renegotiate the key terms already agreed on.

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’s 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. If you have any questions about the capital raising process, including when dealing with lead investors, get in touch with LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.

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