A lead is someone who sets the terms that the other investors will be investing in for a round. Generally, the lead does ⅓ or more of the full financing (although technically a lead can be anyone who sets the terms others invest in). If you got other angels, for example, to invest on the Alchemist note terms, Alchemist was the “lead” for those investors.
Now, you will encounter many investors that will not say no to investing, but will also not say yes to leading -- that is, they don’t want to commit the first check but do want to invest if you get a lead. These investors are trying to maintain optionality. If another fund -- especially a fund that is a “Hot” fund wants to invest in you -- they want to invest. But if another “hot” fund does not, they don’t want to take the risk. These investors are trying to get all the upsides of having access to you without the real conviction of supporting you independently. They will say things like “We’re definitely interested, but let us know when you have a lead” or “Keep us posted. We are in once a lead is secured” or something similar.
This happens a lot. It is especially common with smaller funds that want to do half of a round, or with strategics whose company policies require them to have a professional VC set the terms for the round.
When you get a response like this, we want you to still push these investors toward submitting their interests. Here’s one approach:
Create your own version of a form like this using Google Forms, Wufoo, etc.
Ask the investors to fill out the form to hold their spot. You can use this language (please hyperlink the "fill this form" to your specific form"):
“We have been surprised by the amount of interest we have received. Because of that, we can’t say who will be the lead yet as we are still deciding ourselves what the ideal mix of investors will be. Our advisory board has asked us to drive a deliberate process to treat all investors fairly. Even if you don’t want to lead, if you are interested in investing, we are asking you to fill this form {link to your own form} out to hold your reservation. We will then get back to you if we can invite you into the round. Of course, when we invite you in we will give you more details of who is participating, etc. But we would ask that you trust us to propose who the mix of investors will be as we are trying to put together the right balance of investors to best support the company.”
You want to get them to commit to putting forth an expression of interest via an email or a term sheet by a certain date. The goal is to get everyone -- including leads -- to put forth an expression of interest or term sheet by a certain date.
We will then look at who all is interested in coming in. If you have multiple lead term sheets, you want to first rank which investors you like, and then which term sheets you like. We want to go to our most favored investor and counter offer with a modified term sheet with the best terms we have or the terms we want. A founder friendly term sheet is on the Google Drive if you need one. You can also issue a company-led term sheet. Here is a sample of a SAFE Term Sheet. And check out here other term sheets and SAFEs.
But you may not get a lead. You may get a lot of funds that just want to follow.
In that case, we want to get back to the funds and see if they are open to doing a syndicate. A syndicate is where you have multiple minority investors coming together in a round. The terms of the round can be set by the company -- so the company is the “lead” -- or whoever is the largest investor among the minority investors can by default be called the lead even though they did not draft the term sheet.
What you want to do is circle back to all the people that want to do a minority of the round -- e..g 20% or whatever of the round -- and send them an email asking if they want to be a part of the syndicate. One option is something like this:
“Thank you for your interest in investing in our company. We all very much enjoyed meeting with you and understand the value you can bring. We are in a bittersweet situation of being oversubscribed with interest. Given that, we had a proposal we needed your input on to move forward.
We have the option of going forward with a traditional lead. The lead, however, requires an ownership percentage that will crowd out our smaller investors, including you. An alternative we are exploring is to do a syndicate -- a round where we could invite in the value added investors we like to compose the round without a dominant lead to crowd everyone out.
We can get you in as an investor in the company as part of a syndicate. That is, you would still be just a fraction of the round. The terms of the round are captured in the term sheet below.
If the only way we could have you come in as an investor is via the syndicate, can you let us know if we should hold a spot for you?
We will be making a final decision imminently. After we hear back from you, we will revert back with a final decision.
My best,
[Your Name]”
You may get a lot of your investors to drop off -- maybe ⅔. But whoever you have left you should close. You can draft the term sheet they will sign. A founder friendly term sheet is on the Google Drive if you need one. You can also issue a company-led term sheet. Here is a sample of a SAFE Term Sheet. And check out here other term sheets and SAFEs.