Bridge Financing
Bridge financing is money raised to carry a company to its next round, a sale or profitability when the current runway will not — usually a convertible note or SAFE from existing investors, sized for six to twelve months, converting at a discount into the round it bridges to. A bridge from insiders who believe in the plan is ordinary; a bridge because nobody else will invest is the round before the down round.
- Also known as
- Bridge round, Bridge loan, Bridge note
- Used at
- the gap between rounds when a milestone has slipped, a market has turned, or a licence has taken longer; before a sale, to keep the company alive through the process
- Binding
- a note or SAFE, sometimes with warrants for the bridging investors and a "pay-to-play" clause that penalises investors who do not participate
- Typical terms
- 20–30% discount to the next round's price, sometimes a cap; interest of 6–10% if a note; warrants of 10–25% of the bridge amount for the risk; a maturity of 12–18 months; conversion into the next qualified round or, failing that, into the last round's preferred shares
- Typical size
- three to nine months of burn; a bridge larger than that is a round with a different name
- Parties
- the existing investors (usually the only ones who will), the founders, and the future lead investor, who will read the bridge's terms and its reasons
How bridge financing works in practice
A fintech planned to raise its Series B in month 18 on €8m of ARR; the licence took six months longer and ARR is €5m in month 20 with four months of cash left. The Series A investors offer a bridge: €3m on a convertible note, 25% discount to the B, 8% interest, warrants over €600,000 of shares, maturing in 15 months. The company reaches €8m of ARR in month 28 and raises the B at €40m pre-money; the note converts at €30m-equivalent, the interest converts too, and the warrants dilute the founders a little more. The bridge cost about 30% of its face value in dilution — dear money, cheaper than a down round or a closure.
The signal is the part founders underestimate. New investors ask why a bridge was needed and who provided it. Insiders bridging a plan that slipped for a reason they can explain — the licence — is a story the B lead accepts. Insiders bridging because the company missed its numbers, or a bridge that some insiders declined, is a story the B lead prices, or walks from. Pay-to-play terms — an investor who does not join the bridge loses its preferred rights — exist because the second story is common.
A bridge to a sale is different again: the buyer sees a company that will run out of cash on a date, and prices accordingly.
Example
A lending fintech with €2.5m of monthly burn and five months of cash needs a bridge of €6m to reach the Series C metrics. Three of four existing investors commit €5m on a note at a 25% discount with a €60m cap and 15% warrant coverage; the fourth declines and, under the pay-to-play clause, its Series B preferred converts to common. The Series C closes nine months later at €90m pre-money: the note converts at the €60m cap — a 33% effective discount — and the warrants add €750,000 of shares at the cap price. The bridging investors turned €5m into shares worth €8.3m at the C price; the founders' stake is 2.4 points lower than a B-priced round would have left it; the investor that declined holds common shares behind two preference classes, which is what pay-to-play was for.
Common mistakes
- A bridge sized to the next milestone as planned, not to the milestone as it will actually arrive. - Terms that the next round's lead will have to unwind — a cap so low the bridge takes a fifth of the company. - Bridging a company whose problem is the business, not the timing. - Founders reading insider support as validation when it is the insiders protecting their earlier money. - No plan for what the bridge converts into if the round never comes.