Commercial lenders generally do not participate in Internet company bridge rounds. A company that seeks bridge financing from an identified potential investor in its next equity round should anticipate that negotiations with that investor will take on a new dynamic. A short bridge containing strident default terms and little prospect of conversion can sharply tilt the relationship in favor of the investor. The company also should be aware that the additional time, expense and effort required to finalize a bridge round will delay and increase the cost of its overall deal with the investor. A finder is someone who is not a registered broker-dealer, but who facilitates a relationship between the investor and the company.
Finders typically expect to be compensated with company equity, possibly in addition to cash fees.
Federal and state securities laws generally prohibit the use of persons acting as unregistered broker-dealers to effect securities transactions, with limited and vaguely defined exceptions. Consequently, companies should work with counsel and exercise caution when determining whether and how to use and compensate finders in order to keep within the bounds of those laws. Converting loans to equity Bridge lenders seek to maximize potential returns by having the right to convert the loan to equity at any time or through warrants to purchase company equity at a favorable price. Bridge interest may be paid periodically, may accrue and be paid out when the principal is repaid, or may convert to additional company equity. In some jurisdictions, equity issued in connection with the conversion of a loan is considered to be additional interest for purposes of usury laws, which often have severe penalties.