What Is a Bridge Round and How Does It Work?

A bridge round is interim financing that supports a company between larger funding events. It provides a short-term capital infusion, extending its operational timeline. This funding is typically smaller than traditional equity rounds and bridges a financial gap until the next significant investment is secured.

Why Companies Raise Bridge Rounds

Companies often seek bridge rounds to extend their financial runway, providing time to achieve specific operational or market milestones. This provides capital to continue operations without immediate financial strain, ensuring business continuity during growth phases. For instance, a bridge round might fund a sales push, market expansion, or product development before a larger funding round is feasible.

Another reason for a bridge round is to position the company for a more favorable valuation in a subsequent funding round. If market conditions are unfavorable or the company hasn’t reached a performance benchmark for a higher valuation, a bridge round provides time to improve metrics. This strategic delay allows the company to strengthen its position, potentially avoiding a “down round” where new shares are issued at a lower valuation.

Bridge rounds also navigate unexpected market conditions or delays in closing a larger funding round. While sometimes signaling financial difficulties, they can be a calculated move to sustain accelerated growth or prepare for a significant event like an initial public offering (IPO). This interim funding helps the company maintain momentum towards its long-term goals.

How Bridge Rounds are Structured

Bridge rounds are commonly structured using financial instruments that defer a formal company valuation, such as convertible notes and Simple Agreements for Future Equity (SAFEs). These instruments are preferred for their speed and simplicity compared to traditional priced equity rounds. They allow investors to provide capital with the expectation their investment will convert into equity during the next major funding round.

A convertible note is a short-term loan with terms for its conversion into equity. Key terms include an interest rate, which accrues and is added to the principal upon conversion, and a maturity date, typically ranging from 12 to 24 months. The note also specifies a valuation cap, which is the maximum company valuation at which the investment will convert into equity, and a discount rate, often between 10% and 25%, applied to the share price of the next funding round. The investor typically benefits from whichever term provides a lower conversion price, meaning more shares for their investment.

SAFEs are simpler agreements that are not debt instruments, meaning they lack an interest rate or a maturity date. This eliminates pressure on startups to repay or convert within a specific timeframe. Like convertible notes, SAFEs include a valuation cap and a discount rate, which determine the terms of conversion into equity when a future priced round occurs. The absence of debt-like features makes SAFEs flexible and appealing for early-stage companies. While equity bridge rounds, where preferred shares are issued, exist, they are less common for this type of interim financing due to the complexities of immediate valuation and negotiation.

Key Parties and What They Evaluate

The primary parties in a bridge round are typically the company’s existing investors, such as venture capitalists and angel investors. These investors participate to protect their initial investment and ensure the company has sufficient runway to reach its next milestone. Their participation can also signal confidence to potential new investors. New strategic investors may also join.

For founders, evaluating a bridge round involves considering potential dilution of their ownership. While bridge rounds can delay immediate equity dilution, the conversion terms of convertible notes or SAFEs will eventually impact founder ownership. Founders must carefully negotiate terms like valuation caps and discount rates to minimize equity impact and avoid setting disadvantageous precedents. They also need to articulate a clear strategy for how the bridge funding will achieve value-enhancing milestones.

Investors evaluate several factors when considering participation. They assess the company’s progress since the last funding round, including key metrics. Investors also scrutinize the proposed use of funds, seeking a clear plan for how the capital will enable the company to reach its next major funding event. The likelihood of a successful subsequent funding round is a key consideration, as bridge round investments are repaid or converted upon its closing.