A primer on bridge notes

Some companies need a temporary financing vehicle, often referred to as a “bridge note.” This short-term loan provides a “bridge” to an event that provides the means for the company to pay off the loan in full.

Early stage companies typically use bridge notes as a cash cushion to negotiate the next equity round of funding. The financing can be deployed to extend a runway past a significant value inflection point. This is helpful when a company needs to achieve a significant sales milestone or finalize a clinical study for Food and Drug Administration approval. These milestones impute more value.

Also, a bridge note can be used to help the company pivot strategy or improve a sales process to enhance financial performance. Maybe collecting receivables caused the company stress, and in order to improve critical financial ratios, a bridge loan provides funding to “weather a brief unexpected storm.”

Many times, bridge notes are used to extend the life of a struggling startup whose future is unknown.

At BlueTree, we frequently see them used by entrepreneurs who are starting a company and trying to avoid placing a valuation (enterprise value) on their business. Consequently, it delays the process for determining the percentage ownership of a company for the owners and the investors; this is a tactic to avoid giving up ownership very early in the company’s life cycle.

In any of the above cases, savvy entrepreneurs should know what bridge notes are and how they work.

Know the details

Most bridge notes take the form of convertible debt. That means instead of paying the debt back in the form of cash, the value of the note (plus interest) are “converted” to company stock upon maturity.

Bridge notes often include a discount to the conversion, which is granted on the stock price. For example, if the discount was 20 percent and the stock price was $10/share, the note holder’s proceeds (principal plus interest) would buy the company stock for $8/share. In essence, the note holder gets a premium and can capture more equity in exchange for taking the risk of lending the money.

Sometimes, in order to attract investors, warrants can be added to the note. A warrant is like an option — it grants the right to purchase shares at a set price in the future.

A $500,000 bridge loan with 20 percent warrant coverage would entitle the lender to buy $100,000 worth of stock at a given point in the future. If the company experiences skyrocket growth, these warrants become extremely beneficial.

See the benefits

So what’s the appeal to bridge loans? First, it avoids the issue of valuing the company.

It can buy time to repair the company and turn it around. It can provide a bridge to sustainability after some misfortune that shakes up the company’s operations.

And, it can buy time to seek a strategic investor or venture capital fund that can infuse the company with another significant round of equity capital to help the company scale and become a high-growth entity.


Catherine V. Mott is the CEO and founder of BlueTree Capital Group, BlueTree Venture Fund and BlueTree Allied Angels located in Western Pennsylvania.