Not every fundraise needs to be a formally priced equity round. For early-stage companies — and sometimes for growth-stage companies between priced rounds — bridge financing instruments offer a way to raise capital quickly, with lower transaction costs, while deferring the question of valuation until a later round.
This post explains the main instruments: convertible notes, SAFEs, and bridge rounds — how they work, their key terms, and when each is appropriate.
Why Defer the Valuation?
In a priced equity round (a Series A or B), you and your investors agree on a company valuation, issue new shares at that price, and record the transaction in a shareholder agreement with all the associated rights, preferences, and protections.
That process is correct and appropriate for larger rounds. But for a pre-seed or seed-stage company, or for a startup that needs capital quickly to reach the next milestone before a priced round, the overhead of a full priced round can be disproportionate.
The alternative is to raise capital now on terms that convert it into equity at a future priced round, with the conversion price determined by that future round's valuation. You get the money today, the investor gets shares at the future round, and everyone defers the valuation negotiation to a moment when there's more information.
Instrument 1: Convertible Notes
A convertible note is a debt instrument that converts into equity at a future priced round. It has:
A principal amount: The amount invested. The investor loans this to the company.
An interest rate: Convertible notes typically carry a low interest rate (4–8% annually), which accrues and is often added to the principal at conversion rather than paid in cash.
A maturity date: If the company hasn't raised a priced round by a certain date (commonly 18–24 months), the note becomes due. In practice, notes are usually extended rather than demanding repayment — but the maturity date creates a deadline.
Conversion discount: At the next priced round, the noteholder converts at a discount to the new investors' price — commonly 15–25%. This rewards them for investing earlier and at higher risk.
Valuation cap: The conversion price is the lower of the discount price or a maximum valuation cap. If the company's Series A values it at €20M, a noteholder with a €5M cap and a 20% discount would convert at the lower of €4M (capped) vs €16M × 80% = €12.8M — so €4M. The cap protects early investors from excessive dilution if the valuation rockets.
The economics: If you raise €500k on a convertible note with a €5M cap and the Series A values the business at €10M, the noteholder's €500k converts into equity worth roughly €1M (double the investment) because they convert at half the Series A price. This is why cap levels matter enormously in the negotiation.
Instrument 2: SAFE (Simple Agreement for Future Equity)
The SAFE was introduced by Y Combinator as a simplified, equity-like alternative to convertible notes that removes the debt structure. It has no maturity date, no interest rate, and no debt mechanics.
A SAFE investor is simply investing now in exchange for the right to receive equity in the next priced round — on a cap or discount basis (or both) similar to convertible notes.
SAFEs are more founder-friendly in some ways (no debt, no maturity pressure), but they have become more complex with different variants — pre-money SAFEs, post-money SAFEs, MFN SAFEs — that have materially different dilution implications. The post-money SAFE, in particular, can be significantly more dilutive than it appears on the surface if multiple SAFEs are stacked on top of each other.
Key point: before signing multiple SAFEs, model the fully diluted cap table at conversion, including all the outstanding SAFEs converting simultaneously at their respective caps. This calculation often produces surprises. If nobody on the team owns that model, it is the kind of work to hand to a fractional CFO before the next conversation with investors.
Instrument 3: Bridge Rounds
A bridge round is less a specific legal instrument and more a fundraising pattern: a quick, lightly-documented equity or convertible raise, typically from existing investors (or known angel investors), intended to bridge the company to its next major milestone or priced round.
Bridge rounds are characterised by:
Speed: Because investors are typically existing shareholders who already know the business, the round can close in weeks rather than months.
Smaller size: Usually €150k–€2M, sufficient to reach the next milestone, not a full year of runway extension.
Simplified documentation: Often a SAFE or convertible note rather than a full priced round, to avoid the time and legal cost of a fully negotiated term sheet.
Different investor dynamic: Bridge rounds from existing investors are often done at terms favourable to the company because investors don't want to see their existing position diluted by a down round or a distressed financing.
Bridge rounds are appropriate when: a company is close to a significant milestone (product launch, first major contract, break-even) that will materially strengthen its position for a priced round, and it needs capital to get there. They're not appropriate as a substitute for a genuine strategic funding process when the business needs more than bridging capital.
Key Terms and What to Watch
Cap negotiation: The valuation cap is the most consequential term in any convertible or SAFE instrument. Founders often focus on the immediate cash raised; investors focus on the cap. A low cap can be significantly dilutive at a high valuation Series A.
SAFE stacking: If you raise multiple SAFEs (from different angels or pre-seed funds), the post-money SAFE dilution mechanism means each SAFE converts based on the post-money cap table including all outstanding SAFEs. The cumulative dilution can be much larger than each individual SAFE suggests.
Pro-rata rights: Investors in convertible or SAFE instruments often want pro-rata rights — the right to invest in the next priced round to maintain their percentage ownership. These aren't automatic and should be explicitly addressed in the instrument.
MFN clause: "Most Favoured Nation" provisions give early investors the right to convert on the same terms as later convertible investors if those later terms are more favourable. This can cascade through a large SAFE stack in unexpected ways.
Maturity and extension: For convertible notes, understand what happens at maturity. Some instruments convert at the cap if no round has happened; others demand repayment. Negotiate the maturity term and extension mechanics before signing.
When Convertibles/SAFEs Are the Right Choice
Use a SAFE or convertible note when: the company is genuinely pre-valuation (too early to price reliably), the round is under €1–2M, speed of execution matters, and the investors are angels or early-stage funds comfortable with these instruments.
Use a priced round when: the amount is significant (€2M+), the company has enough track record to price meaningfully, institutional investors are involved who require priced round mechanics, or the business needs the governance structure of a proper equity round (board seats, investor protections, liquidation preferences).
Frequently Asked Questions
Is a SAFE the same as a convertible note? No. Both convert to equity at a future priced round, but a convertible note is debt (with interest and maturity), while a SAFE is not debt and has no maturity date. SAFEs are administratively simpler but have their own complexity in terms of dilution mechanics.
Do convertible notes show up on the balance sheet? Yes — as a liability until conversion. This can affect the appearance of the balance sheet for prospective investors looking at the financials before the conversion event. This is worth flagging in financial presentations.
Can existing investors refuse to participate in a bridge? Yes. Existing investors have no obligation to bridge unless their shareholder agreement includes a pay-to-play provision. In practice, existing investors often bridge rather than dilute their position, but it's a negotiation.
BB Financial Services Kft helps founders model the cap table implications of SAFE and convertible note financings — so you know exactly what you're signing up for before the documents go out. Get in touch if you're working through a bridge or pre-seed raise.
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