Early-stage venture financing

This paper develops a theory of venture financing at the earliest stages. Ventures choose between issuing equity or a "SAFE", which gives investors the right to a number of shares to be determined by a future equity price. Our key assumption is that between two rounds of financing the market learns information that is initially private to the entrepreneur. Higher quality types prefer a SAFE over equity for the first round of financing because under the SAFE they know that their types will be revealed to the market before the determination of the number of shares they must provide to investors. Offsetting this benefit of SAFEs is a moral -hazard (debt-overhang) cost. We find initial support for the theory in a data set of 500 financing rounds.