Dear elizy: I’m raising my seed round right now. An investor I met with got really excited about joining my round. He said he would like to join once we have a lead. Do I need a lead? What is a lead? What should I do?
-Leadless in Mtn View
Dear Leadless: Without knowing the details, here’s some general advice.
1. Technically speaking, you do not need a lead.
You can certainly feel free to raise your round by setting your own terms on standard convertible notes or convertible securities. Investors will simply look at the terms and decide whether they want in or not. If they think your terms are unreasonable, they will simply decline to join your round.
Typically, these investors will not invest a whole lot of money – i.e. angels and seed VCs (~$5k-$300k).
The benefit to doing this type of “party round” is that it’s typically cheaper in legal fees and you can start collecting checks right away.
2. Practically speaking, many investors are sheep (followers) and will want you to have a lead investor to validate your business.
If an investor says that they will come in when you have a lead, that may sound like a good thing, but it’s actually a bad sign. It means they would like to be a follower. It means they do not have enough conviction about your business without validation from other people. These investors are not first-movers, and you should move on immediately and approach other investors.
HOWEVER, it is common for almost all investors to ask you if you have a lead. This does not automatically mean that the asking-investor is a follower. An investor may be curious because he/she wants to know:
- If you are setting the terms yourself or if someone else is
- Who the lead investor is (if you have one); some investors work well together and others do not
- If you are raising a priced round or not
- If you are not raising a round w/ a lead, how much money you are raising and what happens if you don’t hit that goal
- If the lead position is still open and may potentially want to lead your round
So, when an investor asks you if you have a lead, it is your job as the entrepreneur to understand the rationale for this question and figure out if the investor is a follower or an independent.
Cover photo by NordWood Themes on Unsplash