Facebook has been pitching for a new round of funding these last few months to bridge itself to an IPO sometime in the future. We’ve known that since October, when (former) CFO Gideon Yu was in Dubai. In December CEO Mark Zuckerberg said the company was open to raising new money but only at the previous $15 billion valuation set by Microsoft.

But we’ve heard more recently that the company has been pitching hard for new cash at a much reduced valuation, hoping for at least $4 billion. And some investors are biting, but not at that price. A source with knowledge of the possible transaction tells us that Providence Equity Partners (who are also investors in Hulu) and General Atlantic may have submitted term sheets at “around $2 billion” valuations.

Will Facebook take the expensive new money from Providence or General Atlantic? They may be forced to. They’re burning as much as $20 million a month in cash and are dealing with ridiculous growth. They likely have less than two years runway left, and possibly significantly less if they continue to add new users by the tens of millions that are currently flocking there every month.

The cost of taking money at such a low valuation is higher than it appears. In addition to the direct dilution to stockholders from the new money, old investors at the $15 billion valuation may need to be made whole. Venture rounds traditionally include anti-dilution provisions that give investors more stock if the company raises new money at a lower valuation. Those anti-dilution provisions are heavily negotiated and can end up anywhere from full protection (which is very rare) to no protection at all (which is also very rare). It’s likely that there will be some form of additional dilution, possibly a lot of it, from the $375 million Facebook has raised at that valuation.

As an interesting side note, Providence was heavily involved in the $15 billion round, and submitted a term sheet in the $10 billion range or higher at that time. The big rumor is that Facebook convinced Microsoft that the competition was Google, not a private equity firm, and it helped close the deal at a much higher rate. If there is truth to these rumors, and we believe there is, Providence dodged a big bullet by waiting patiently for the market to come down.

Source: Techcrunch