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Legally you are not committed to the investment until you sign the definitive documents and send in your check. Typically both the entrepreneur and the lead investor will be checking with investors throughout the diligence and negotiation process to gauge the level of interest and commitment of each investor. An entrepreneur will want to know whether he or she is negotiating over $100K or $500K of collective angel investment, so they will likely also be checking with investors. It is normal for investors who expressed initial interest to drop out because they discovered issues in due diligence that make them less enthusiastic, or because they do not like where the terms negotiation ended up, or because of other time or financial commitments that arise for them during the weeks or months that the process takes.
Angels are free to increase or decrease their intended level of investment as they go through the diligence process and term sheet negotiation.
important No one should complain if you decide anywhere in the process that you will not invest or will invest less than you had initially indicated, until you are asked for your firm commitment from either the entrepreneur or the lead investor. Firm commitments are used to generate the definitive documents, so pulling out after those are generated likely requires more work and legal costs for the parties involved and would be viewed as very bad form. If you are making a verbal commitment or “handshake deal,” we suggest following Y Combinator’s handshake deal protocol.
The Lead Investor
Almost always in priced equity rounds, and often in convertible note rounds, there is a lead investor.
The lead investor is typically an experienced angel investor (or institutional investor) who negotiates the detailed terms of the deal with the entrepreneur, including the valuation. They also often have the thankless task of coordinating the due diligence efforts, working with the lawyer(s) representing the investors (including hiring and paying them, to be reimbursed later by the company), and reviewing the final documents. They may also be coordinating with other angel groups or investors on the closing date.
cautionThis is time-consuming work, and it can feel like herding cats at times—wealthy, busy, sophisticated cats. Investment rounds can bog down if no one is willing to step up and be the lead. We would not recommend that you take on this role until you have invested in a couple of deals and have some experience with the process.