Convertible note raised with 40% discount rate.The bridge round investors effectively get to invest in the Series B at a $10M post-money valuation (instead of $30M). Convertible note raised at $10M valuation cap.Here’s what would happen to the bridge round investors at Series B, depending on whether a valuation cap or discount rate was used: Because of this, they managed to subsequently raise a $10M Series B at a $30M post-money valuation. They now want to raise a $2M bridge round to hit certain growth milestones before raising a Series B-planned another year from now.Īssume the $2M bridge round goes as planned and the startup uses the funds raised to hit its desired milestones. Imagine a startup raised $5M in a Series A one year ago at a $10M post-money valuation. For instance, in a scenario where the startup is facing financial difficulties, investors may negotiate to invest at a valuation that’s lower than that of the previous round. This is especially the case if the bridge round investors are the same as those from the previous priced equity round.Īn important caveat: like everything else in venture investing, bridge rounds are negotiable. If the parties choose to use preferred shares instead, the bridge round will likely track the terms of the last priced round. They'll likely set the valuation cap to the post-money valuation of the previous priced round (to learn more about how debt financing works, read our guide to convertible notes). If the parties use convertible debt for the bridge round, they'll set either a valuation cap or discount rate to the next priced equity round. In edge cases, a combination of both debt and equity can be used-although this is rare for early-stage startups. However, founders can use preferred shares for bridge rounds as well. Bridge rounds are often structured as convertible debt, as each party wants to optimize for speed. Startups will first target existing investors during the bridge round and raise from new investors if additional funding is needed. This is what Robinhood did with a $1B bridge round in January 2021 before its IPO six months later. ![]() Large, late-stage companies also use bridge rounds to put together additional financing in preparation for an IPO. These are positive scenarios and should be an easy sell to investors. The startup could also be experiencing higher-than-expected growth, and require more cash to sustain this pace. Achieving these milestones could result in a nice valuation bump in the next priced round. Sometimes, raising a bridge round allows the startup to hit certain milestones. To hit certain milestones or sustain accelerated growth.While this scenario may arise from a sudden change in market conditions, it can also be due to poor decision-making or financial planning by the founders. This scenario is the reason bridge rounds often have negative connotations. Without a bridge round, the startup will likely shut down ( 29% of startups fail because they run out of cash). The startup is not getting enough traction, and their cash is quickly running out. ![]() But there are different reasons they may need cash, each with very different implications. Why Do Startups Use Bridge Rounds?Įvery startup raises a bridge round for one reason: it needs additional cash. We’ll end with some considerations for investors when deciding whether or not to fund a bridge round. ![]() In this guide, we’ll cover why startups use bridge rounds, how bridge rounds work, and key considerations when structuring a bridge round. Bridge rounds might also provide an interim cash infusion to capitalize on rapid growth or prepare for an IPO. While bridge rounds often carry negative connotations-such as implying the company is in financial trouble-that is not always the case. What is a bridge round? It’s an interim financing round intended to keep the company afloat until the next, larger financing round. When a startup needs additional capital between two rounds of financing, they might raise a “bridge financing round” (often abbreviated to just “bridge round”). Bridge rounds are typically structured as convertible debt.Bridge rounds can imply that a startup is facing difficulties-although this is not always the case.Bridge rounds are interim financing rounds raised between larger funding rounds.
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