Document Type
Article
Publication Date
2012
Publication Citation
18 Journal of Corporate Finance 1104 (2012).
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).
Recommended Citation
Broughman, Brian and Fried, Jesse, "Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley" (2012). Articles by Maurer Faculty. 775.
https://www.repository.law.indiana.edu/facpub/775