Nov 4, 2009
How are bridge financings structured?
Bridge financings are generally structured as debt that is convertible into shares of the equity sold in the next round of financing, usually an as-yet unauthorized series of convertible preferred stock. The debt may be secured or unsecured. In order for the note to convert, the next round of financing typically must meet certain criteria negotiated between the borrower and the creditor relating to the size of the round, whether or not a new investor must participate (and, if so, the extent of that participation), and the date by which the financing must occur (usually, the date the debt matures). The conversion price is based on the price per share of the new equity sold in the next round, but depending on the circumstances of the bridge financing (i.e., who has superior negotiating leverage), the conversion price per share may be discounted.
Bridge debt is also commonly convertible at the option of the holder into previously authorized series of equity or into as-yet unauthorized equity in the event of a financing that does not meet the negotiated criteria alluded to above (commonly at a steeper discount than would apply were the criteria met). Bridge debt is also ordinarily subject to acceleration in the event of change-of-control transactions, including mergers and sales of all or substantially all of the company's assets.
