Bridge financing is defined as short-term funding designed to provide a company with working capital until it secures a larger, more permanent round of financing or reaches a specific liquidity event. In venture capital, bridge rounds typically convert into equity at the next priced round rather than requiring repayment.
How Bridge Financing Works
A bridge fills a cash gap. The company needs capital to continue operations, but a full equity round is either not ready or not optimal at the current moment. Instead of negotiating a priced round under duress, the company raises a smaller amount from existing investors, typically structured as a convertible note or SAFE.
The standard bridge terms include:
- Principal amount, usually enough to fund 6 to 12 months of operations
- Conversion discount, typically 15% to 25% off the next round’s price
- Valuation cap, setting a maximum conversion price to protect bridge investors
- Maturity date, usually 12 to 18 months, by which the note converts or must be repaid
- Interest rate, often the minimum required by IRS imputed interest rules (around 2% to 3%)
If the company raises a qualifying round before maturity, the bridge converts automatically into the new preferred stock at the discounted price. If maturity arrives without a qualifying round, the note either converts at the cap or becomes payable, though enforcement of repayment is rare in practice.
When Companies Bridge
Bridge financing serves several legitimate purposes:
Milestone extension. A company is 2 to 3 months away from a key metric, such as a revenue target or product launch, that would significantly improve its valuation in a full round. A bridge lets it reach that milestone before pricing equity.
Market timing. Fundraising conditions are temporarily unfavorable. Rather than accepting a down round, the company bridges until conditions improve.
Closing gap. A term sheet is signed but the equity round takes 60 to 90 days to close. A bridge provides immediate operating capital.
Strategic pivot. The company is shifting its strategy and needs time to demonstrate traction in a new direction before approaching new investors.
Bridge Financing in Private Equity
In private equity, bridge financing takes a different form. PE-backed companies may use bridge loans to fund bolt-on acquisitions before permanent financing is arranged, or to provide working capital during a recapitalization. These are typically structured as short-term senior secured loans with higher interest rates and origination fees.
General partners also use subscription lines as a form of bridge at the fund level, drawing on the credit facility to fund investments quickly and calling capital from limited partners afterward.
Risks and Considerations
The primary risk of bridge financing is that the next round never materializes. If the company cannot raise, bridge investors face a difficult choice: convert at potentially unfavorable terms, extend the note and invest more, or attempt to recover their investment from a company with limited assets.
Repeated bridges without progression toward a full round are a warning sign. Each bridge adds to the cap table complexity and increases the liquidation preference stack, making the company less attractive to new investors. This dynamic can create a downward spiral where each bridge makes the next full round harder to close.
Frequently Asked Questions
What is the typical structure of a bridge round?
Most bridge rounds are structured as convertible notes or SAFEs that convert into equity at the next priced round, usually with a discount of 15% to 25% and sometimes a valuation cap. This avoids the need to negotiate a full priced round under time pressure, which would likely result in unfavorable terms for the company.
Who typically provides bridge financing?
Existing investors provide the majority of bridge financing, since they have the most context on the company and the most to lose if it runs out of cash. New investors occasionally participate, but they typically demand more aggressive terms including higher discounts, lower caps, or warrant coverage.
Is bridge financing a red flag?
Not necessarily. Companies bridge for many reasons, including extending runway to hit a specific milestone, timing a raise with better market conditions, or filling a gap between a signed term sheet and a closed round. However, repeated bridges without a clear path to a full raise can signal deeper problems.
