Do VCs use inside rounds to dilute founders? Some evidence from Silicon Valley

Brian J. Broughman and Jesse M. Fried

Journal of Corporate Finance, 2012, vol. 18, issue 5, 1104-1120

Abstract: 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).

Keywords: Venture capital; Dilution; Corporate governance; Inside rounds; Corporate law; Inside financing (search for similar items in EconPapers)
JEL-codes: G24 G32 G34 K22 M13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:18:y:2012:i:5:p:1104-1120

DOI: 10.1016/j.jcorpfin.2012.06.012

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