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Are you a small business owner or startup founder looking to raise equity finance for your business? You may have come across websites and marketing materials referencing “lead investors”, especially in the context of crowdfunding. This article will explain what a lead investor does, why they can be important, and a few legal considerations you might want to consider when considering partnering with a lead investor.
Overview
A lead investor is not a legal term. Instead, it is a term commonly found in the startup investment community. It refers to investors specialising in buying sizable shares in early-stage companies, along with a group of other investors that take smaller stakes.
Lead Investors in Crowdfunding Raises
You are likely to come across references to lead investors if you consider partnering with a crowdfunding platform to raise money for your business.
Crowdfunding
As a reminder, a crowdfund is a particular way to raise money for your business. Usually, there are three parties to a crowdfunding transaction:
- your business;
- your investors; and
- the platform that connects you to your investors.
Crowdfunding is different from other kinds of financing because the platform connects you with many different potential investors. Each may want to invest relatively small amounts in your company. But, taken as a whole, you may be able to raise a lot of money if you initiate successful crowdfunding.
There are two common kinds of crowdfunding:
- loan-based crowdfunding also called peer-to-peer lending (P2P);
- equity crowdfunding.
Who Are Lead Investors?
Lead investors in a crowdfunding deal tend to be professional investors or high-net-worth (HNW) individuals looking to sponsor startups and early-stage companies with strong growth potential.
Unlike “company-led” crowdfunding, the lead investor will contribute a large portion of their money and, in exchange, will usually get more control over the fundraising process (and the subsequent growth stage of your company).
The Purpose of Lead Investors
From their perspective, they are hoping to find the next “unicorn”. Lead investors believe that their return on investment will be much higher by investing earlier rather than later.
From your perspective as a business owner, lead investors are helpful for two reasons:
- they can provide you with a substantial portion of the money you need; and
- by securing their support first, you can attract additional investors more easily.
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Lead Investors vs Company-Led Crowdfunding
In many cases, lead investors will take charge of the fundraising process (and beyond) by requiring the company to agree to terms usually set out in a shareholder agreement.
Suppose you decide to partner with a lead investor. In that case, they will usually require you to agree to specific terms set out in a shareholder agreement, which is a contract between the business owners (you) and the investors. This is different from any rights they have as shareholders in your company. Usually, they will impose additional obligations on you that are more restrictive than what they can acquire merely as a shareholder.
For company-led crowdfunding, where there is no lead investor involved, each of your potential investors is unlikely to have as big of a stake, which means they have less leverage to dictate the terms of their investment. This can be an advantage to company-led crowdfunding.
Securing a Lead Investor
The process for securing a lead investor in a crowdfund depends on the platform you are using.
However, in all cases, the goal is to have secured a substantial amount of the money you intend to raise (25%+) before you officially “go public” on the crowdfunding platform.
Most crowdfunding platforms will let your business “privately” launch your crowdfunding, meaning you can restrict who has access to your business’ site on the platform’s website.
Key Takeaways
A lead investor invests a large amount of money in your company, usually as part of a crowdfunding campaign. The advantage of having a lead investor is that you can raise your funding more quickly because you are getting more of it from a single source. In addition, by having a single backer, more investors may be willing to invest in your business.
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Frequently Asked Questions
In the context of a crowdfunding campaign, a lead investor will be one of the first investors to commit funds to your business. They will provide a substantial sum of money, which can attract additional investors.
Because they are advancing your company with such a substantial amount of capital, they will usually require you to give them a sizable amount of control in the decision-making process. This is legally structured through various contracts and company law, including shareholder agreements.
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