SaaS Bridge Rounds: When to Raise, How Much, and Fair Terms

Evaluating Your Options: Is a Bridge Round the Right Move?

Your runway is shorter than you thought. The milestones you targeted for your Series A are taking longer to hit, and the date your bank account hits zero is looming. This common, stressful scenario often leads SaaS founders to consider a bridge round, a form of interim funding designed to be the critical link to your next priced round. However, it comes with significant risks.

Securing a startup runway extension without accepting punitive terms requires a clear strategy. Before building a deck, you must honestly assess if this is the right tool for the job. A bridge round is not a lifeline for a failing business; it's strategic capital. By definition, a bridge round is designed to provide runway to a priced round within 6 to 12 months. It exists to get your startup from one valuation milestone to the next, more valuable one.

First, consider the alternatives. The most immediate lever is to cut your burn rate. This is the least dilutive option but may slow growth. Can you freeze hiring or reduce marketing spend without jeopardizing the very metrics you need to improve? Cutting too deeply can damage morale and stall critical momentum, so this requires a delicate balance.

For more mature companies, venture debt is a potential alternative. As a rule, venture debt is a potential alternative for companies with predictable revenue, typically >$2M ARR. This form of non-dilutive capital for SaaS is reserved for businesses with a solid financial track record, so if you do not meet that threshold, it is likely not a viable path.

An extension round, which is a small, priced round typically led by existing investors, is another option. However, it involves the legal and administrative complexity of a priced round without the large capital injection, making it less efficient for a small funding gap.

A bridge round is your best option when you have a credible, data-backed plan to significantly increase the company's value in the next 9 to 12 months but lack the capital to execute it. It is for when you can clearly articulate how this interim funding will directly lead to achieving specific ARR milestones or a dramatic improvement in sales efficiency.

How to Raise a Bridge Round: Sizing It With the "Milestone + Buffer" Formula

One of the most common mistakes founders make is miscalculating the size of their bridge, leaving them in the same difficult position just a few months later. Calculating how much cash you truly need is not guesswork; it is a formula. What founders find actually works is a simple but effective calculation to determine the right amount.

The formula is: Bridge Amount = (Monthly Net Burn x Months to Milestone) + 3-Month Buffer.

Let’s break down each component:

1. Monthly Net Burn: This is the total amount of money your company loses each month. You can calculate this directly from your accounting software, whether it’s QuickBooks for US companies or Xero in the UK. Simply subtract your monthly cash inflows from your monthly cash outflows. Be ruthlessly honest with this number.
2. Months to Milestone: This is the core of your fundraising narrative. It is the number of months you project it will take to reach the specific, fundable milestone that justifies a new, higher valuation for your next priced round. For SaaS fundraising strategies, this is often a target like $1.5M ARR or achieving a CAC Payback Period of under 12 months. The 'Months to Milestone' component is typically 9 to 12 months.
3. 3-Month Buffer: Fundraising always takes longer than you expect. This buffer accounts for unexpected delays, deal negotiations, and the time it takes for cash to hit the bank. The 'Buffer' component is a non-negotiable 3 months.

Here is an example calculation:

• Your Monthly Net Burn is $150,000.
• You need 10 months to reach your milestone of $2M ARR.
• Your non-negotiable buffer is 3 months.

Bridge Amount = ($150,000 x 10 months) + ($150,000 x 3 months) = $1,500,000 + $450,000 = $1,950,000.

This structured approach ensures you raise enough to not only hit your goals but to do so with a margin of safety.

Negotiating Fair Terms for Your Interim Funding

Negotiating bridge terms that avoid punitive dilution is a primary concern for founders. The deal is most often structured using one of two instruments: a Convertible Note or a SAFE (Simple Agreement for Future Equity). There is a key geographic difference here: SAFEs are more common in the US, while Convertible Notes are often preferred in the UK and by more traditional, risk-averse investors. Knowing who you are pitching to can inform your starting point.

SAFE (Simple Agreement for Future Equity)

• Type: A SAFE is an equity warrant, not a debt instrument.
• Interest: It does not accrue interest.
• Maturity Date: It has no maturity date, meaning it does not need to be repaid by a certain time if conversion does not occur.
• Geography: It is most common in the US startup ecosystem.

Convertible Note

• Type: A convertible note is a debt instrument that converts into equity at a later date.
• Interest: It accrues interest, which is typically added to the principal for conversion. Interest rates for convertible notes are standard in the 4-8% range.
• Maturity Date: It has a set maturity date, usually 18 to 24 months, at which point the debt must be repaid or converted.
• Geography: This instrument is often preferred in the UK and by more traditional venture capital firms.

Key Economic Terms: Cap, Discount, and Preference

Regardless of the instrument, the key economic terms you must negotiate are the Valuation Cap and the Discount. The investor's shares will convert based on whichever term provides them a better price.

• Valuation Cap: This sets the maximum valuation at which the investor’s money converts into equity in the next priced round. For early-stage SaaS, valuation caps for seed-stage SaaS companies often range from $8M to $15M.
• Discount: This is a percentage discount on the valuation of the next round. For example, a 20% discount means the bridge investor's money converts as if the company was valued at 20% less than what new investors are paying. Discounts on bridge rounds are typically 15-25%.

Finally, a critical but often overlooked term is the liquidation preference. This dictates who gets paid first in a liquidity event. Anything other than a standard preference can complicate future rounds. It is essential that liquidation preference multiples on bridge rounds should be 1x.

Remember to start with your current investors. A 2023 Carta report found that over 80% of bridge rounds include participation from prior investors. Their involvement signals confidence to new potential funders. Use Carta's tools to model SAFE and note conversions to better estimate dilution and cap table outcomes.

Building the Narrative: The Key Metrics for SaaS Fundraising Strategies

The reality for most pre-Series B startups is more pragmatic: you do not have a full-time CFO, and your financial data lives in a mix of Stripe, your CRM, and QuickBooks or Xero. Investors at this stage do not expect a perfect BI platform, but they do demand a credible narrative backed by clear metrics.

Your pitch should tell a story of progress and demonstrate a clear plan for the funds. This is not a moment for complex, 50-slide decks. A concise, 3-part narrative is far more effective.

A Simple 3-Part Bridge Narrative Structure:

1. The Situation & Progress: Start with, "Here's our current burn and why we need this bridge. Since our last round, we have achieved X, Y, and Z." Show you have been a good steward of previous capital.
2. The Plan & The Milestone: Clearly state, "With a bridge of $X, we will extend our runway by Y months to achieve this specific, measurable milestone (e.g., $1.5M ARR and reducing churn before Series A)."
3. The Ask & The Team: Conclude with, "We are raising a $X convertible note/SAFE with these standard terms. Our core team is fully in place to execute this plan."

To make this narrative believable, you must support it with trend-based data on a few core SaaS metrics:

• ARR Growth: Show a consistent upward trend in Monthly Recurring Revenue (MRR). This demonstrates that your core engine is working and there is sustained demand for your product.
• Churn and Retention: You must show you can keep the customers you acquire. A decreasing Gross Revenue Churn or an increasing Net Dollar Retention (NDR) is powerful proof of product-market fit and customer health.
• Sales Efficiency: Investors need to see that you are not just buying unprofitable growth. The CAC Payback Period is the key metric here. Showing that your payback period is improving or staying within a healthy range (e.g., under 18 months) demonstrates sustainable growth.

Producing these metrics shows you understand your business levers and have a clear, data-driven plan to reach the next fundable stage.

Final Checklist: Executing a Strategic Bridge Round

Successfully navigating a bridge round is about strategy, not desperation. It is a tool to secure a startup runway extension that positions you for a stronger Series A or B, not a last-ditch effort to survive.

Before you commit, re-evaluate your options. Cutting your burn is always the first step. If you have predictable revenue over $2M ARR, explore venture debt as a non-dilutive alternative. If a bridge is the right path, size it correctly using the "Milestone + Buffer" formula; the 3-month buffer is essential and protects you from unforeseen delays.

When it comes to terms, anchor your negotiations around standard, founder-friendly conditions. Know the difference between a SAFE, which is common in the US, and a Convertible Note, often preferred in the UK. Push for a 1x liquidation preference and understand how the valuation cap and discount will impact your future dilution. Lean on your existing investors first, as their participation is a powerful signal.

Finally, your success hinges on your narrative. Use the data from your existing tools like QuickBooks, Xero, and Stripe to build a clear story around improving ARR, retention, and sales efficiency. This focus on key metrics will demonstrate that you’re not just asking for more time, but for the fuel to reach a specific, more valuable destination. See the Fundraising Stages guide for your next steps.

Frequently Asked Questions

Q: Can you raise a bridge round from new investors?
A: Yes, but it is less common and can be more difficult. Over 80% of bridge rounds include existing investors, and their participation provides a strong signal of confidence. Approaching only new investors for a bridge might suggest that your current backers are unwilling to provide more capital, which can be a red flag.

Q: What happens if you cannot raise a Series A after a bridge round?
A: This is a significant risk. If you miss the milestones outlined in your bridge narrative, you may face a down round (raising money at a lower valuation), have the convertible note convert at a low cap, or even face insolvency. This is why sizing the round correctly and setting achievable goals is critical.

Q: How does a bridge round impact employee stock options?
A: A bridge round using a convertible instrument adds complexity to your capitalization table. While it does not immediately dilute the option pool, the future conversion into equity will. It is important to model the potential dilution scenarios to understand the future impact on all shareholders, including employees.