HQQA022 Do you have a lead?

What they mean

When a VC says ‘lead’ what they mean is a ‘lead investor.’ This is needed more with a priced round, but you also need one to get people together in a convertible note. A lead investor is the person you negotiate the terms with, that does the most due diligence and will likely lead communication with you after a deal has been consummated. They act as social proof to encourage ‘followers’ to get in on the deal.

If you do a priced round, then the lead investor will likely have ‘main investor rights’ and sit on your board. You expect they will at least do their ‘pro-rata’ or lead the next stage too (if they serve that next stage).

Finding a lead is the most important thing that a founder has to do in getting a round done. There are fewer leads than one would think. Most investors are followers. This means they won’t do anything until you have found a lead. It’s best to always ask investors if they lead rounds, or not?

If the person you’re talking to is the follower, that means they can’t move on this until you have found a lead. If that investor is a lead, then they are wondering if they have competition. Lead investors (Mainly VCs) are unlikely to ask this question- they will presume you are talking to them as you want them to lead. Followers are the ones who ask this as they want a lead (then they will ask who it is and hope it is a big, brand name firm).

You will frequently find in angel rounds that first-time angels will say “I haven’t done a deal before, so I’d like an experienced investor lead the round and I’ll join.” Basically, they know that they don’t know what they are doing, so they don’t want to mess up. They hope to learn the ropes by learning from the experienced person you find.

Finding a lead can be a huge pain in the ass, so concentrate your effort finding one first (ideally).

What you need to say

“We know that finding a lead is the most important thing and is, therefore, our focus. We understand that you frequently lead rounds and this is why we are talking to you as one of our first meetings. From what you understand so far, would you be interested in being the lead?”