Wefunder Lead Investor – 10% Fees to Reg CF Investors

[Brian]

Yes – this is something I intend to do a more detailed blog post on in the coming weeks.

Wefunder has moved to the Lead Investor structure (investor FAQs here) as of early 2020. Nearly all deals moving forward will have this structure.

The primary reason is that this is Wefunder’s method for getting around the “messy cap table” issue. Previously, when investors would invest in a company on Wefunder, each of those investors would end up being an individual line item on the cap table. This can be a big turn-off for startups, since later-stage investors typically don’t like to see messy cap tables, so it can impact their ability to raise future rounds of capital.

So the Lead Investor is compensated by each of the investors. Investors pay 10% of profits on any future exit – so there is no fee unless you make money. And that 10% is split 50/50 among the XX Fund at Wefunder (the custodian) and the Lead Investor (an individual representing the crowd).

While 10% of profits may seem like a lot, the hope is that the Lead Investor’s share of 5% of these profits will be enough to incentivize them to add more value than that back to the crowd of investors.

They can do this in several ways, such as:

1. Negotiating better terms with the company (e.g. if they can negotiate a price that’s 10% better than the price that you would have paid if there was no lead investor, then they have already made the price worth it)
2. Giving the crowd investors a voice in terms of voting rights. Previously this was typically delegated to the CEO, who may have conflicting interests than the investors, such as when considering a repurchase of crowdfunding securities. Thus, this lead investor should vote to give the crowd a voice and prevent more of these potentially negative outcomes.
3. Stand up for the rights of the crowd in future financings and funding rounds – again, give the crowd a voice (and vote) to stand up to later-stage investors who may try to impose changes or terms that would harm crowdfunding investors.

In addition, the company gets access to mentoring from XX team and others.

In general, it’s going to be hard to pinpoint an exact value and say “yes, the lead investor brought me at least 10% of additional value” to make it worth it. However, in the long run, I do think it may lead to a better balance in terms of favorable terms and more protection and control for the smaller crowdfunding investors.

As with anything, though, you should weigh this on a case-by-case basis. Is the lead investor actually someone that you think will add this value? Or are they just a name and a pretty face that will tax you of some of your profits?

[Scott]

My understanding is that the lead investor is selected by the raising company. It can pretty much be anyone (a personal friend, etc.). I also heard that they’re automatically approved if they invest a large sum but may need to be reviewed by Wefunder if that is not the case.

Can anyone confirm this?

[Brian]

Scott – I believe what you said to be mostly correct. Per the Lead Investor Founder FAQ page:

• The issuer chooses the lead investor, with the approval of Wefunder (must be mutually agreed upon)
• Wefunder will “almost always approve a Lead Investor that invests $20,000 or more on the same terms as other Wefunder investors, provided there is no conflict of interest or family ties.”
• Otherwise, they only ask that a Lead Investor invests at least $1,000 in the company on the same terms
• Looks like the only major disqualifier is that they can’t be a family member

[Scott]

That’s really my only concern with the selection process. I’d hate to have a founder reach out to “Bob” their best buddy, who ends up being they’re “Yes man.”