Early-stage venture financing

Alvaro Parra and Ralph Winter ()

Journal of Corporate Finance, 2022, vol. 77, issue C

Abstract: 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.

Keywords: Venture financing; Asymmetric information; SAFE’s (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0929119922001341
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:77:y:2022:i:c:s0929119922001341

DOI: 10.1016/j.jcorpfin.2022.102291

Access Statistics for this article

Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter

More articles in Journal of Corporate Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().