What Is a Bridge Round? Understanding Startup Bridge Funding

In the fast-paced world of startups, timing is everything, especially when it comes to securing capital. While traditional funding rounds like Seed, Series A, or Series B get most of the attention, there’s a lesser-known tool in a startup’s financial toolkit: the bridge round. Often used to “bridge the gap” between major funding events, these interim rounds can help to sustain momentum, hit critical milestones, or simply stay afloat. But while they offer flexibility, bridge rounds also come with unique risks and strategic considerations that every founder and investor should understand.

Understanding Bridge Rounds

What is a Bridge Round?

A bridge round is interim financing used to help fund operations between larger financing rounds. Sometimes known as a bridge loan, these rounds are typically smaller in size than other financing rounds and are usually comprised of convertible debt. Bridge rounds can be and are implemented throughout the life of a startup, from early to late stage. They may be employed when startups require additional capital to fill a gap between funding cycles or to reach specific milestones before securing additional investments.[1]

Why Startups Use Bridge Rounds

Boiled down, startups use bridge rounds when they need more money. This can be due to various reasons, depending on where a startup is in its lifecycle. Startups may use bridge rounds for the following reasons:

Sustaining Operations: Ensuring continuity in operations during critical growth phases without immediate financial strain.
Milestone Achievement: Reaching milestones that could bolster the startup’s valuation and attractiveness to larger investors.
Strategic Positioning: Creating a buffer period to negotiate better terms and conditions for subsequent funding rounds.

For example, Robinhood employed a $1B bridge round in January 2021 in an emergency capital infusion, six months prior to their IPO.[2] This situation can assign a negative connotation towards bridge rounds, as it may serve as an indicator to investors that the company is not stable. While this scenario may be brought on by changing market conditions, it can sometimes be an indicator of poor cash management.

Structuring a Bridge Round

Bridge rounds are often structured as convertible debt but can also be structured as preferred shares and in rare cases, a combination of equity and debt. Typically targeted at existing investors, bridge rounds are commonly structured by the issuer or a financial institution.

When structuring a bridge round as convertible debt, the company typically sets either a valuation cap or a discount rate. The valuation cap is often based upon the post-money valuation of previous rounds. If the issuer chooses to structure the bridge round as preferred shares, the round typically follows similar terms as their last priced round.[3]

How Bridge Rounds Work

There are two routes a startup can take when it comes to bridge financing: debt or equity. Typically, startups prefer debt, while investors prefer equity.

Debt Financing

Often, bridge rounds are structured as convertible debt. These notes are structured so that upon maturity (theoretically the next round of funding over a certain amount), the investor’s bridge note will convert into equity shares. Like a convertible note, bridge notes typically convert at a discount to the next round, and this percentage can vary. Valuation caps may also be added to a bridge note, which are intended to protect investors from unrecognized gains in the value of the startup during the bridge period.

Concerns with Debt Financing

Something startups should be wary of when pursuing debt financing during a bridge round is combining a discount with a high interest rate payable to the investor. It’s important to strike a balance between incentivizing the short-term investment (the bridge debt) without disincentivizing the long-term investment (Series A, for example).

An Example

Let’s assume a bridge investment of $50,000 in a note where terms include a 30% discount and 8% simple interest per annum. Two years later, it’s time to start work on securing a Series A round, hypothetically priced at $1.00 per share. The holder of that $50,000 note would be entitled to $58,000 of equity at $0.70 per share – 82,857 shares. Put more simply, startups may want to structure the note in a way that dilution doesn’t become an issue later.

It’s also possible that the next round of funding – the qualifying event that converts the loan to equity – may never happen. If a qualifying event does not occur, it can leave both the startup and its investors in a negative situation.

Equity Financing

For a startup looking to avoid high interest rates on debt, they may go the equity route instead. Under this structure, the startup usually finds a venture capital firm to fund the bridge round in exchange for equity ownership in the startup. Naturally, startups tend to be more wary of this kind of financing because of the loss of control.

Benefits and Risks of Bridge Rounds

Benefits for Startups

Allows for Business Continuity: Bridge rounds can provide quick capital to maintain operations, pay salaries, and avoid growth disruptions.
Buys Time to Hit Key Milestones: They extend the startup’s runway, helping meet product, revenue, or customer acquisition goals.
Enhances Strategic Flexibility: Offers breathing room to pivot, reassess priorities, or refine go-to-market strategies.

Risks for Startups

Ownership Dilution: Bridge rounds can reduce equity for founders and early investors, especially if valuations are low.
Valuation and Investor Pressure: Interim funding sets expectations that may be hard to meet in later rounds.
Ongoing Financial Strain: Terms like interest, repayment, or conversion clauses can burden future financial planning.

Benefits for New Investors

Discounted Valuations: Early entry often means lower valuations, offering upside potential.
Strategic Influence: Investors can align with the company early and help shape its growth trajectory.
Favorable Deal Terms: The interim nature allows for negotiation leverage on terms like liquidation preferences or governance.

Considerations for Existing Investors During a Bridge Round

Understanding Strategic Intent

For existing investors, participating in a bridge round requires a clear understanding of the company’s strategic intent. It’s important to engage with the startup’s leadership to grasp why the additional capital is needed and how it aligns with the broader growth roadmap. Is the funding meant to accelerate product development, extend runway to a key partnership, or support a new market entry?

Progress Toward Previous Milestones

Equally important is evaluating the startup’s progress toward previously stated milestones. Has the company demonstrated traction in areas like customer acquisition, revenue growth, or product validation? These insights can inform whether the bridge round is a necessary catalyst or a sign of deeper challenges.

Financial Due Diligence

Financial due diligence is also critical at this stage. Investors should assess the startup’s burn rate, cash flow projections, and how far the proposed funding will extend the company’s runway. This includes understanding whether the bridge round will realistically carry the business to its next funding milestone or potential exit opportunity.

Final Thoughts

Bridge rounds serve as a double-edged sword, offering a lifeline when capital is needed most, but also signaling potential red flags if not structured or utilized wisely. For startups, they can unlock critical breathing room to reach the next stage of growth; for investors, they present early opportunities with potential upside. However, the success of a bridge round can hinge on clear strategic intent, thoughtful structuring, and diligent financial oversight. Understanding how and when to use bridge financing can make the difference between a well-timed boost and a costly misstep.

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[1] https://carta.com/learn/startups/fundraising/bridge-rounds/

[2] https://www.reuters.com/article/us-retail-trading-robinhood/robinhood-raises-1-billion-of-fresh-funding-from-existing-investors-idUSKBN29X2ZN/?il=0

[3] https://seedblink.com/2024-12-19-bridge-rounds-a-sign-of-trouble-or-a-smart-financing-solution-in-2025

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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