Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley

Authors

Brian Broughman, Vanderbilt University Law School
Jesse Fried, Harvard Law School

Document Type

Article

Publication Title

Journal of Corporate Finance

Publication Date

12-2012

ISSN

0749-5587

Page Number

1104

Keywords

Venture capital, Dilution, Corporate governance, Inside rounds, Corporate law, Inside financing

Disciplines

Commercial Law | Law

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

Brian Broughman and Jesse Fried, Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley, 18 Journal of Corporate Finance. 1104 (2012)
Available at: https://scholarship.law.vanderbilt.edu/faculty-publications/1607