Terms of Endearment: Financing Terms for Deep Technology Startups on a Crowdfunding Platform

Abstract

Public science firms generate positive outcomes, but transitions for their private startup counterparts across the so-called ``Valley of Death'' remain challenging. Like other new ventures, they use modern tools to raise capital, such as crowdfunding and simplified convertible debt instruments, but these strategies have been poorly studied for the economically important niche of early-stage science firms. New data from a ``deep technology'' equity crowdfunding (EC) platform show that those investors make different decisions than their offline counterparts. Debt and a related instrument, the Simple Agreement for Future Equity (SAFE), are used successfully in both channels as early-stage vehicles, but selection and funding outcomes differ. Relative to life sciences and data sciences, engineering or hardware firms experience a significant penalty if they elect to offer convertible debt instruments. Equity crowdfunding investors strongly prefer the SAFE to a traditional debt instrument, but are relatively insensitive to the specific terms. These findings impact the understanding of entrepreneurial finance and the policy associated with science-based ventures.