This post in Techcrunch raises interesting issues around what seems to be a trend in VC financings for "lead" investors to get a better deal than "follower" investors in the same round. The article asserts that this is typically effected by issuing the "lead" investor shares from the equity incentive pool (called the "ESOP" in the article).
When I started working on VC financings as a lawyer in the (very) early 80's, one of the first things I noticed was that "lead" investors, who did all, or certainly most, of the work on VC financings (e.g., the due diligence, negotiating the term sheet, determining the appropriate valuation, assigning a partner to sit on the board, etc.) didn't get anything extra for it. They got exactly the same deal as the passive "follower" investors, who did none (or a lot less) of the work.
This struck me as odd, but, when I asked more senior people why the practice existed, I was told either (1) "hmmm...I never thought about it..."; or (2) the "...VC community is small, and most VCs know that, next time, they're likely to be the "lead" and have to do all the work, without getting anything else for it...". That is, the principle of reciprocity drove the practice.
Nowadays, the VC community is so much larger, it's not uncommon for a VC to have a long career and never c0-invest more than once with any particular other VC firm -- so, one would think that the principle of reciprocity can't continue to be the driving force (if it ever was).
This "nothing-extra-for-the-lead-investor" practice in the VC world has always contrasted starkly with the common practice in the world of later-stage, bigger-deal private equity/buy-outs, where "lead" investors get significantly better terms, sometimes to the point of outrageous excess (IMHO), than the passive investors who just put money in. The additional compensation is justified by claims of the additional time, energy, work and attention that the lead investor focuses on the deal --i.e. the same things that "lead" VCs do in early-stage financings.
So, if the Techcrunch article is accurate, and the practice of "value added" (lead) investors asking for terms better than those offered to the follower investors is growing, I think it's interesting to ask the question, especially in today's much larger VC world (large, and diverse, enough that it's hard to call it a "community"): if the "lead" VC investor is to get a better deal than the passive, follower investors, who should pay for it?
There are only three possibilities. The "extra" dilution attributable to the "lead" investor can be borne by (1) the existing shareholders, (2) the new investors or (3) shared in some way by the existing shareholders and new investors.
So, it matters to the existing shareholders of a company where any additional shares issued to the "lead" (or, in the Techcrunch article "value added") investor come from. If they come out of the ESOP, then, in the ordinary course, the dilution is suffered by the existing shareholders, not the new investors (whether "lead" or "follower"). One wonders whether that's the fairest outcome? Then, again, when it's a negotiation among a willing buyer (the VC) and a willing seller (the Company), what role does (abstract) "fairness" play?