Bridge Loans

What

A placeholder for materials related to bridge loans.

What Fred Said

A bridge loan is a form of debt financing that usually provides capital to the company to extend the runway for getting another round done. First, bridge loans are a bridge to something else - most commonly they are a bridge to a round of financing with new investors (outsiders). They can also be a bridge to the sale of the company (Wilson, 2022, below).

Fred Wilson says that the ideal structure is a convertible note, with nominal interest, and a discount upon conversion into the next round of financing. Participation "should" be based on pro rata ownership of shares. If you can't get your majority owner to contribute then the "smaller guys" end up "carrying" the majority owner to the next round of financing (also kind of tough to explain to new investors when you get to the end of the bridge).

Fred likes "the discounts to be based on the amount of time the bridge note is outstanding. This creates an incentive to get the round done quickly, which is what everyone wants in this situation. It is also easier to explain the discount to the new investors in the next round when the discount is small if the bridge has not been outstanding for long. And it is understandable if the discount is larger when the bridge has been outstanding for a longer time period. I like to start with a 5% discount and cap the discount at 25%. The ideal discount is between 10% and 20% and so the time frame for the various discounts should be set with that in mind."

Here's the rest of this concise overview from USV partner Fred Wilson in his AVC blog from August 8, 2022.

#NewVentureFinancing; #Bridgeloans; #runway