How should a lead investor in a seed round get paid for their role?
In public markets, a high-profile investor will get the benefit of a better price for seeing and sharing an opportunity.
In pre-seed private company investment, investors that go first will usually have a lower price.
At Series A stage, a high-profile lead investor will buy as much of the round as possible. That way they have all the upside of the opportunity and do not have others benefiting from their work.
Seed-stage investors have the power to transform a company into “real” in the minds of the outside world. (Alex Danco calls this transformative power priest-like.) Yet it is still common for lead seed-stage investors to fund around half the round and leave room for other investors.
If a high-profile seed investor does the work to lead a round, they instantly make the deal more marketable to other investors. How should the lead investor share in this value created?
Option 1: Different Prices
The lead investor could get a different price.
For example, by investing in a SAFE or other convertible instrument at a lower cap than other investors. It is important to disclose this well and do it right by getting good legal/tax advice.
Option 2: Board or Advisor Options
The lead investor could get more equity (in the form of options) for becoming a board member or advisor to the company.
Is overpaying for the future service? Did the lead investor create the value upfront by attaching his/her name to the company?
Option 3: Take the Whole Round
Seed investors could also behave more like Series A investors and buy as much of the round as possible. If more funds go this route, it is another reason for fund sizes to continue to grow.
Option 4: Trade Dealflow
Lead investors can trade non-monetary value with other investors. For example, trading dealflow with other investors they let into the round. It could be like taking turns on who is the lead investor. “I’ll do the work on this deal and you do the work on the next one, but we will both get to invest in both.”
Questions
Do lead investors create value by publicly leading the round?
How do you see them getting paid for it?
How should it work?