A gap often opens between two major funding rounds for growing companies. The next round is not yet ripe, but existing capital is not enough, or the company wants to reach an important milestone first to lift its valuation. In this phase two instruments play a key role in growth financing: bridge financing and mezzanine capital.
The gap between two rounds
An equity round is expensive, lengthy and dilutive. Raising a full round at the wrong time, for example just before a decisive product launch, gives away valuation. It is often wiser to create a bridge that carries the company to the next value step. Bridge financing does exactly that: it provides short-term liquidity that converts into equity in the next regular round, often the Series A, or is repaid.
The bridge is therefore not a substitute for the actual round but a temporal buffer. It is negotiated faster because the final valuation is deferred, and it keeps the company operational. It is frequently structured as a convertible loan that pushes the valuation dispute into the future.
Convertible loans as a typical bridge structure
The most common bridge instrument is the convertible loan. Investors provide a loan that automatically converts into shares at the next round, usually at a discount to the price then negotiated. This discount and any valuation cap are the central negotiation points. They reward early entry without locking in a valuation today.
The appeal is speed: a convertible loan is set up in days, while a full round takes months. The price: the founder only defers dilution, they do not avoid it. Stacking several bridges can leave a founder more diluted than a clean round. In our startup financing we always model the dilution scenario across all bridge stages before recommending an instrument.
Mezzanine: equity-like without full dilution
While the bridge is usually a precursor to an equity round, mezzanine capital is a financing layer in its own right between debt and equity. It bears traits of both: it pays interest like debt but is subordinated and partly shares in success, for instance via an equity kicker. For banks it counts as economic equity, expanding the debt capacity.
Mezzanine suits companies that already generate cash flow and do not want further dilution but still need growth capital. It is more expensive than a bank loan but more flexible and without the full control loss of an equity round. For more mature growth companies, as considered in the context of growth financing, it is often the better instrument than another equity round.
Which instrument fits when
The choice between bridge and mezzanine depends on maturity and cash flow. An early-stage startup without meaningful revenue heading toward a Series A usually fares better with a bridge as a convertible loan, since it has no cash flow for ongoing interest. An established growth company with stable cash flow can service mezzanine and avoid unnecessary dilution.
In practice both can also be combined or weighed against direct equity financing. Those seeking long-term stable capital and willing to give up shares are better off with a clean round, which we support in equity financing. The right choice is always a function of time horizon, cash-flow profile and willingness to dilute.
FAQ
How does a bridge differ from a normal round? The bridge defers the valuation and provides only short-term liquidity, usually as a convertible loan. The regular round fixes a valuation and brings in lasting equity.
Is mezzanine equity or debt? Economically it lies in between. It pays interest like debt but is subordinated and partly shares in success. Banks often count it as economic equity.
Does a bridge dilute founders? Yes, but only upon conversion in the next round. Discount and cap determine how much. Several stacked bridges can dilute more than a single clean round.