Bridge financing is a short-term funding mechanism designed to sustain a company until it secures its next major funding round or reaches a specific milestone. Bridge rounds are typically smaller than priced rounds and often use convertible instruments (convertible notes or SAFEs) that convert into equity at the next round.
In Depth
Bridge financing fills the gap between where a company is and where it needs to be for its next major fundraise. It provides runway extension without the time and complexity of a full priced round.
Common scenarios for bridge financing include: the company needs 3-6 more months to hit Series A metrics, an unexpected cash need arises between planned funding rounds, market conditions make a full round difficult to close quickly, or a strategic opportunity requires immediate capital.
Bridge rounds typically use convertible instruments — convertible notes or SAFEs — rather than priced equity. These instruments convert into shares at the next priced round, usually at a discount (15-25%) to reward bridge investors for the additional risk. They may also include a valuation cap that sets a maximum conversion price.
FP&A teams should model bridge financing carefully. Key considerations include: the dilutive impact of the discount and cap, the interest accrual on convertible notes (typically 6-10% per annum), the runway extension provided, the milestones achievable with the additional capital, and the impact on the next round's cap table.
For UK startups, bridge rounds from existing investors are common and can often be completed quickly (2-4 weeks) since existing investors already have knowledge of the business.
Real-World Example
A UK SaaS company at £1.2M ARR needs 4 more months to reach £1.8M ARR for a competitive Series A. Current runway is 5 months. Existing seed investors provide a £400K bridge using a convertible note with 20% discount, £15M cap, and 8% annual interest. The FP&A team models: bridge extends runway to 9 months, the company reaches £1.8M ARR in month 4, Series A at £18M pre-money converts the bridge at £12M effective valuation (the cap), giving bridge investors a 50% better entry point than Series A participants.
Related Terms
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A convertible note is a short-term debt instrument that converts into equity at a future funding rou...
A SAFE (Simple Agreement for Future Equity) is an investment instrument that provides the investor w...
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