publication . Article . 2012

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

Brian J. Broughman; Jesse M. Fried;
Open Access
  • Published: 01 Jan 2012 Journal: Journal of Corporate Finance, volume 18, pages 1,104-1,120 (issn: 0929-1199, Copyright policy)
  • Publisher: Elsevier BV
  • Country: United States
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 valuati...
Subjects
free text keywords: Strategy and Management, Economics and Econometrics, Business and International Management, Finance, Economics, Opportunism, Economic rent, media_common.quotation_subject, media_common, Venture capital, Litigation risk analysis, Exploit, Valuation (finance), business.industry, business, Corporate governance, Adverse selection
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