What is a Lead Investor on Wefunder?
The bare-bones definition of your Lead Investor on Wefunder is someone who:
- Invests in your community round. (We recommend that they invest a minimum of $5,000 or 5-15% of your funding goal)
- Holds the sole voting right on behalf of everyone else who invested in your community round.
How does the lead investor role actually play out?
Say you raised a $2M community round from 2000 investors.
Wefunder rolls those 2000 investors into a single line on your cap table using what’s called an SPV (Special Purpose Vehicle).
In the future, whenever your company needs to authorize a corporate action, your lead investor will vote on behalf of the 2000 members of the SPV, representing that $2M share of your cap table.
Your lead investor can talk to the other investors in the SPV, but they don’t have to. When the other investors in your SPV invest, they entrust their voting rights to the lead investor.
What’s the difference between a lead investor on Wefunder and a lead investor in VC?
A lead investor in the VC industry is not the same as a lead investor on Wefunder. The only thing they have in common is their name.
A VC lead investor sets the terms of the round, gets the majority of the carry from the round, and holds the flag for the entire raise. Typically, a lead investor in a VC round is a VC firm rather than an individual.
A Wefunder lead investor holds the voting rights for all the investors in the SPV—that’s it. The lead investor on Wefunder needs to be a person, though the money for their investment could come from a fund. They don’t get board rights. They don’t get directive over your roadmap. But at some point before a liquidity event, you’ll need to turn to them and go, “We’re going to do this. Do you agree?”
When do I need a lead investor?
You're required to confirm a lead investor before you file a Form C, which is a legal pre-requisite for Wefunder to prepare to send your money to you.
But we suggest lining up your lead investor as early as possible—before moving onto the Private Launch phase, if possible.
Finding one person to appear on your campaign page as the Lead Investor can be a powerful signal for other prospective investors who visit. More on that below.
How should I choose my lead investor?
First and foremost, make sure you trust them.
They hold the voting power for everyone in your Community Round. They might also be in business with you for the next ten years. Your lead investor should be someone you trust deeply.
Find someone who can invest at least 5-15% of your funding goal.
Even though the minimum investment from a lead investor is $5,000, you’re best off finding a lead who invests at least $10,000, or at least 5-15% of the round. The lead investor’s investment signals confidence to the public. If other investors see that the lead didn’t even put in $10,000, then they’ll be unlikely to put in $15,000.
Signal greater social proof with a trusted name.
A traditional VC deal happens behind closed doors. On Wefunder, your lead is the public face backing your company from day one.
Enlisting a lead investor who’s well-respected in your industry or community sends a positive signal to other prospective investors: “Oh, if that person is investing $100K as a lead, then I’m a lot more confident investing my $1,000.”
For example, biotechs have chosen doctors and research scientists as leads. Tech companies have chosen professional VCs and angels as leads. Past Wefunder campaigns have even seen Bill Nye the Science Guy and Iggy Pop as leads.
But you don’t need to enlist a celebrity to have an effective lead. As with anything involving risk, simply seeing anyone else take the first plunge makes it less scary to follow.
How does the lead investor benefit?
Pro rata rights. A pro rata right gives an investor the right to maintain their initial ownership percentage during later financing rounds. For example, if your company raises more financing down the road, your lead investor can decide to raise additional funds to prevent any dilution of the SPV’s ownership percentage.
For example, let’s say the lead investor invests $50K in your $1M community round. Instead of getting pro rata rights on their $50K investment, they get pro rata rights on the full $1M.
10% of carried interest on pro-rata raises. If the lead investor decides to raise more financing to maintain the SPV’s ownership percentage, they get an additional perk. Upon a future liquidation event (like a sale, merger, or IPO), the lead investor will get 10% of the carried interest on that pro-rata raise—whether they raised the money from other accredited investors or their own funds.
It’s like the other investors who participate in that pro-rata raise pay the lead investor a 10% commission on carried interest to “facilitate” the raise. On a successful exit, this can mean hundreds of thousands of dollars.
Minimum risk. If you fail to reach your minimum funding goal, the lead investor’s investment goes right back into their bank account. This allows them to support your raise, without actually having to commit the cash upfront.
They’re also indemnified in the contract they sign during the Wefunder process.
What does the lead investor need to do?
Validate your terms and invest. Just as a VC or angel investor would do in a private round, your lead investor will work out the terms of the deal with you. Then, on those terms, the lead investor invests.
Vote when the time comes. When it comes time to vote on corporate actions, your lead investor votes on behalf of everyone else in your SPV.
Who can’t be my lead investor?
Your lead investor cannot be:
- An Officer or previous Officer of your company.
- A Director or previous Director of your company, unless they are only a Director as a part of their previous investments in your company. They can’t have any day-to-day responsibilities.
- Any current or previous employees
- Any family members of any current or previous Officers, employees, or Directors.
Recap / tl;dr
- You need a lead investor to raise money on Wefunder.
- The lead investor invests in your SPV, signals to the public that your company is worthy of investment, and signs some contracts upfront agreeing to hold the voting rights for all the individuals in your SPV. Then they don’t have to do anything, unless you need to take a corporate action that triggers a vote among your investors.
- Choose someone you trust first and foremost who can invest at least $5,000 or 5-15% of your funding goal.
