Lead Investor

A lead investor leads a financing round. The investor negotiates the key terms, often invests the largest amount, and frequently coordinates the review of the company. Other investors usually join on the terms negotiated by the lead investor. In concrete terms this means presenting the term sheet, setting the valuation, determining the structure of preferential rights and commissioning the legal and financial diligence whose results are made available to the following investors.

For founders this is a considerable relief, since they do not have to negotiate separately with every provider of capital, but it also concentrates bargaining power in one party. The signalling effect is substantial: a respected lead attracts further investors, while a round without a lead is hard to place because nobody wants to set terms and carry the diligence work. Beyond money the role regularly brings ongoing involvement, usually through a board seat, information rights and the expectation of participating pro rata in later rounds. That is what the role is judged on later, because a lead that fails to support a difficult phase seriously damages the company's ability to raise capital.

In choosing a lead, therefore, reserves available for follow-on investment, sector experience and reliability in difficult situations matter alongside valuation. It should be borne in mind that this investor regularly sets a round's terms and that changing later is difficult, because the rights agreed carry through all subsequent rounds. Speaking with founders of the investor's other holdings before deciding is therefore advisable, particularly those whose companies have not developed as planned. Cooperation in difficult phases says more than the presentation of a success story.