Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley
Brian J. Broughman
Indiana University Maurer School of Law
Jesse M. Fried
Harvard Law School
June 27, 2012
Journal of Corporate Finance, Volume 18, 1104-1120 (2012)
In the bank-borrower setting, a firm’s existing lender may exploit its positional advantage to extract rents from the firm in subsequent financings. Analogously, a startup’s existing venture capital investors (VCs) may dilute the founder through a follow-on financing from these same VCs (an “inside” round) at an artificially low valuation. Using a hand-collected dataset of Silicon Valley startup firms, we find little evidence that VCs use inside rounds to dilute founders. Instead, our findings suggest that inside rounds are generally used as “backstop financing” for startups that cannot attract new money, and these rounds are conducted at relatively high valuations (perhaps to reduce litigation risk).
Number of Pages in PDF File: 51
Keywords: Venture capital, dilution, corporate governance, inside rounds, opportunism, corporate law, inside financing, adverse selection
JEL Classification: G24, G32, G33, G34, K12, K20, K22, M13Accepted Paper Series
Date posted: June 27, 2011 ; Last revised: April 26, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.359 seconds