Poshvik Nutrition takes an insider bridge as a convertible note with a 25% discount and a cap at 70% of the last post-money. The next round prices lower. Which term binds, how much does the bridge own, and what would a flat round have given it?

The discount binds: 75% of Rs 240 crore is Rs 180 crore, below the Rs 210 crore cap, so the bridge converts at Rs 180 crore and owns 6.25% after the round. In a flat round at Rs 300 crore the discount would give Rs 225 crore, so the cap would bind instead and the bridge would own 5.62%. Below a Rs 280 crore pre-money the discount decides; above it the cap does.

Imagine a shop coupon that says 25% off, but never more than Rs 210 for this item. If the item's price falls, the 25% off is the better deal; if the price rises a lot, the Rs 210 ceiling is. You always pay the lower of the two. A convertible note with a cap and a discount converts at whichever of the two valuations is lower, because the lower valuation buys more shares for the same Rs 15 crore. The cap protects the bridge when the next round is priced high; the discount rewards it for lending before anyone knew the price.

Here the discount gives 75% of Rs 240 crore, Rs 180 crore. The cap is 70% of the last Rs 300 crore post-money, Rs 210 crore. Rs 180 crore is lower, so the discount binds. Per share: the round price is Rs 240 crore over 100 lakh shares, Rs 240, and the note converts at Rs 180. Rs 15 crore buys 8.33 lakh shares, the new investors' Rs 60 crore buys 25 lakh, and the bridge ends with 6.25% of 133.33 lakh shares.

At Rs 300 crore pre-money, the round price is Rs 300 a share and the discount price would be Rs 225 crore of valuation, Rs 225 a share. The cap of Rs 210 crore, Rs 210 a share, is lower, so now the cap binds. Rs 15 crore buys 7.14 lakh shares, the new money buys 20 lakh at the higher price, and the bridge owns 5.62%. The two terms hand over to each other at a Rs 280 crore pre-money, where 75% of the round price equals the Rs 210 crore cap.

Insiders bridge to buy time for a round they expect to be lower. A cap set at 70% of the last post-money tells everyone the insiders themselves expect a down round, and the discount makes sure they are paid for the risk whatever the price turns out to be. The cost falls on the existing holders, founders and any investors not in the bridge: in the down round they keep 75.00% of the company, against 78.65% in a flat round.

Say the limitations. Interest on the note, often 8% to 12% a year in practice, usually converts too and adds shares; check the note itself. And the round's own definition of pre-money matters: if the new investors insist the note's shares sit inside the Rs 240 crore, the founders absorb all of the bridge's dilution. Finally, a bridge signals to outside investors that the insiders would not lead a priced round, which is why the next lead will ask why.