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Bridge Financing

Is bridge financing a loan?

Convertible Notes are technically loans with interest. SAFE agreements are not loans but contractual rights to future equity.

What is a Discount Rate?

It's a percentage discount (e.g., 20%) given to early investors on the share price of the next funding round as a reward for their risk.

Can I repay the bridge loan instead of converting?

Usually, investors prefer conversion. Repayment is typically only an option if the maturity date is reached without a conversion event.

Does Georgian law recognize SAFE agreements?

Yes, under the contract freedom principle of the Civil Code, SAFE agreements are valid and enforceable in Georgia.

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Introduction: What is Bridge Financing?

Bridge financing is a form of short-term funding used to cover a company's (often a startup's) capital needs between major investment rounds. As the name implies, it is a "bridge" connecting the company's current state to future, larger financing (e.g., from Seed to Series A). With the development of the startup ecosystem in Georgia, bridge financing is becoming increasingly popular. It is typically structured as a Convertible Note or a SAFE (Simple Agreement for Future Equity). This instrument is critical when a company needs cash quickly to reach a specific milestone that will subsequently increase its valuation.

What Does This Service Cover?

Legal support for bridge financing requires specific knowledge of venture deals:

  • Agreement Structuring: Deciding which instrument is better: Convertible Note (debt) or SAFE (equity promise).
  • Drafting Terms: Defining critical terms such as Discount Rate, Valuation Cap, Interest Rate, and Maturity Date.
  • Conversion Mechanisms: Detailed outlining of when (e.g., new investment, sale of company) and under what conditions the debt converts into equity.
  • Investor Relations: Obtaining consents from existing investors and aligning corporate documents (e.g., charter).
  • Negotiation: Engaging in negotiations between the investor and the company to achieve the best terms.

Common Real-World Scenarios

Bridge financing is used in specific scenarios:

  • Running Out of Cash (Cash Runway): A startup is running out of money before Series A and needs an extra 6 months to finish the product.
  • Delayed Negotiations: Closing the main investment is delayed due to bureaucracy, and the company needs to continue operations.
  • Rapid Growth Opportunity: An unexpected opportunity arises (e.g., acquiring a competitor) requiring quick capital.
  • Pre-IPO: A company needs financing to cover the costs of going public.

Georgian Legal Framework

Bridge financing instruments are based on the Civil Code of Georgia (loan agreements) and the Law on Entrepreneurs. The new Law on Entrepreneurs (2021) significantly simplified the use of convertible instruments by introducing concepts of "conditional capital" and various share classes. This allows parties to legally agree on debt-to-equity conversion under pre-defined conditions, which was previously problematic. Investor rights protection is ensured through contract law.

Service Process

The process involves:

  1. Term Sheet: Agreeing on key commercial terms (Amount, Cap, Discount).
  2. Documentation: Drafting the Convertible Note or SAFE agreement.
  3. Corporate Decision: Preparing minutes of the partners'/shareholders' meeting approving the loan.
  4. Signing & Transfer: Closing the deal.
  5. Conversion (Future): When the trigger event occurs (e.g., new round), the lawyer formalizes the capital increase and share allocation.

Why Use Legal.ge?

Bridge financing carries risks for both the investor and the founder. Poorly drafted terms (e.g., a very low Valuation Cap) can mean excessive dilution for the founder in the future. Legal.ge gives you access to startup lawyers who understand venture math and will protect you from "toxic" terms.

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