Texts with Founders: Participating funds asking for lead investor rights
Texts with Founders: Participating funds asking for lead investor rights
How to push back on unreasonable asks from follow-on funds.
Welcome to the 28th weekly post from Texts with Founders — tested tactics for early-stage startups.
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Texts with Founders: Participating funds asking for lead investor rights
Two things frequently happen once you’ve signed with a lead investor:
Most potential investors who said “I’ll invest $X when you have a lead” disappear. (See TWF: Conditional Commits)
Smaller funds will request terms reserved for the lead:
Non-lead investors asking for certain terms, such as pro rata, is not outrageous. While granting pro rata to follow-on investors isn't standard, but it's not wildly uncommon either. I’ve been offered pro rata many times.
Beyond unusual terms, sometimes investors don’t even ask—they tell you, “I’m in for $X,” and send a side letter granting them special rights without providing any context.
I like to assume that investors who do this are goofy rather than malicious or greedy. But regardless of intent, you must decide how to handle this request for additional rights.
Consider a few things:
How much you need their money.
How unusual are the requests?
In this example, an ODF founder already had a lead signed/wired. If you’re in a similar position, you have a strong BATNA — you can simply walk away.
What types of requests did the investor they make and what is their approach? Are they seeking pro rata (uncommon but reasonable to try for) or a board seat (if so, run)? Were they transparent before committing to invest? Does it seem they tried to sneak something in post-commit?
If you push back on requests, it’s possible the investor withdraws.
This should work if you want to push back on their requests:
“I’m excited about the prospect of having you on board. We aren’t doing side letters for participating funds this round. Would love to work with you but understand if that’s a deal-breaker for you.”
In the example above, I emphasize my genuine interest in working with the fund while providing an easy exit if they want to take it. I believe it’s fair to offer an easy way to withdraw instead of making it painful and awkward.
Here’s what happened in this example with the ODF founder:
The founder had already received the wire from their lead investor.
They liked this potential fund but did not want to favor it over others in their round.
They pushed back on the request for special rights and gave the investor an “out."
The investor decided to not finalize ther investment.
The founder said this about the experience:
They passed, though I feel more relaxed about not having their $Xk than I would have if I had it with the strings attached.
Remember that investors are pros and most founders—even wildly successful ones—operate at an information disadvantage. That’s why I write Texts With Founders—to equip founders with tools to level the playing field.
Happy New Year!
That’s all for this week — thanks for reading.
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- Julian
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Recent Posts:
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VCs that Ghost - Dealing with investors that drag out the process
Intros and Forwardable Emails - Make it easy for connectors to facilitate introductions
Browse the full archive.
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