What is bridge financing and when do companies use it?

Full Explanation

Bridge financing is short-term debt or convertible instruments used to fund operations between major equity rounds, typically converting to equity at the next round's valuation.

Bridge financing bridges a gap: the company needs cash before the next institutional round closes. A SAFE, convertible note, or simple loan provides 3-12 months of runway. On a SAFE/convertible, investors receive a discount (typically 20-30% below Series A valuation) and possibly a valuation cap. The bridge converts automatically when Series A closes — the investor effectively gets discounted Series A shares. Bridge financing is common and signals confidence: investors willing to provide bridge typically expect Series A will close. For founders, bridge can be attractive (cheaper than revenue-based financing, simpler than equity) but can complicate Series A negotiations if too many bridge investors with large discounts are outstanding. Multiple bridge rounds (bridge 1, bridge 2, bridge 3) can become messy — cap table complexity discourages Series A investors. Professional approach: target one bridge round maximum, keep it to 6-9 months of runway, and move to Series A. Cheap money signals weakness; quality bridge investors should be credible funds or angels willing to deploy larger capital later.

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