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

  • Broughman, Brian J.
  • Fried, Jesse M.
Registered author(s):

    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).

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    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 18 (2012)
    Issue (Month): 5 ()
    Pages: 1104-1120

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    Handle: RePEc:eee:corfin:v:18:y:2012:i:5:p:1104-1120
    Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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