Should Your Lead VC Veto Other Investors?

Fundraises tend to either have a lead investor, or be a party round.  If you have a lead investor, they will negotiate and set the overall financing terms with you (valuation, round structure, etc.), put in the bulk of the money, and sometimes take a board seat.

Some lead investors also ask to have veto rights on who else can invest in your round.  In general you should solicit their opinion, but not give them veto rights [1].

As an entrepreneur you only get to do a handful of fundraises, so VCs often have insights into which other investors to include (or exclude) and why.  However, the lead investor may also have a number of conflicts in terms of who else they want to invest in your company that have nothing to do with increasing the value and success of your company[2].

These conflicts include:
1. Blocking competitors.
Many funds view other funds as their competitors.  Sometimes they want to block one another out of a company so that they keep the upside (or branding of a hot company) for themselves.

2. Favors.
Some investors trade favors.  They will let someone invest in your round in exchange for a favor later.  E.g. "If I let you invest in this hot company now, I expect you to let me invest in the next hot company you work on".

This horse trading usually does nothing good for the entrepreneur.  It is simply currency for investors to gather and trade.

3. Voting blocks.
Sometimes a lead will bring in an investor who will always vote their way.  E.g. I know one VC that pulls a large University endowment in as an investor in companies it is funding.  This endowment always votes it shares the way the VC tells them too - increasing the %age of preferred the VC controls.

4. Ego.
Investors have different tiers.  Sometimes the investors are focused on the brand value of the other investors versus how helpful they are to the company.  E.g. "this other investor is beneath me, so they should not invest in the round I am leading".

As an entrepreneur, your primary selection criteria should be helpfulness & ethics of investor, not whether your lead investors views them as an equal.

5. Personal dislike.
Some investors just don't like each other.  They may have insulted each other on Twitter or at some industry event and now don't want to work together.

As you can tell, none of the reasons above should impact your company.  The focus in a fundraise should be on building the best possible investor team around your company.

Takeaway: Your lead investor should not have the right to block who else invests in your round.  You want to consult them and get their feedback on the round, but also need to make your own decisions.

Notes
[1] The nice way to do this is to tell the lead investor that you value their input and feedback on other investors and you will be soliciting it along the way.  However, it is ultimately up to the company to chose who the investors are.  All of you are aligned on trying to get the best possible people around the company to help it and that is the focus of how you will close the fundraise.

[2] There are also lots of genuinely helpful reasons a lead may want to help shape the round.  As investors in many other companies, they have grown to learn who is actually helpful versus not.  Similarly, they may have seen other investors act in an actively destructive manner.  So, your lead investor may have great input for you.

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