Feb 18, 2026 .

CCPS Bridge Round: Founder Dilution Math

CA Jom Jose

CA. Jom Jose is a Fellow Chartered Accountant and Registered Valuer (Securities or Financial Assets) under IBBI. As a Partner at Sam & Jom, Chartered Accountants, Kochi, he brings extensive experience in finance, audit, and business advisory. His deep interest in understanding how businesses create and measure value led him to the field of valuation.

An active member of the Bangalore Valuers Association (BVA), Jom attributes much of his professional growth to the learning ecosystem, mentorship, and collaborative spirit nurtured by the Association. Through his work and continued learning, he remains committed to advancing excellence in the valuation profession.

Bridge rounds are often described as “temporary oxygen.” In reality, they can quietly redesign the cap table. Many founders accept bridge funding through Compulsorily Convertible Preference Shares (CCPS), believing valuation will be finalized in the next institutional round. However, the mechanics of valuation caps, discount rates, liquidation preferences, and maturity clauses can dramatically alter ownership outcomes — especially when growth does not meet projections. This article unpacks the practical mathematics and structural risks embedded in CCPS bridge rounds.

1. Valuation Cap vs. Discount Rate — They Are Not Equivalent

Bridge instruments usually convert at the lower of:

A valuation cap, or
A discount to the next round valuation

At first glance, both seem investor-friendly yet reasonable. The trap lies in how differently they behave across scenarios.

Example Structure

Bridge investment: ₹5 crore
Proposed next round (Series A): ₹50 crore pre-money
Discount: 20%
Valuation Cap: ₹30 crore

Scenario A: High Next Round Valuation (₹50 crore pre-money)

Conversion via Discount:

₹50 crore × (1 – 20%) = ₹40 crore effective valuation

Bridge investor converts at ₹40 crore valuation.

Ownership % = 5 / (40 + 5) = 11.11%

Conversion via Cap (₹30 crore):

Ownership % = 5 / (30 + 5) = 14.29%

➡ Investor chooses the cap.

➡ Founder dilution increases by over 3%.

The higher the next round valuation, the more powerful the cap becomes. A cap effectively shifts upside from founders to bridge investors.

Scenario B: Weak Next Round (₹28 crore pre-money)

Discounted valuation:

₹28 × 80% = ₹22.4 crore

Now the discount is better for the investor.

Ownership % = 5 / (22.4 + 5) = 18.25%

When performance weakens, the discount hurts founders more than the cap would have.

Conclusion:

Caps reward strong growth. Discounts penalize weak growth.

Either way, founders rarely “win.”

2. Founder Equity Loss — The Compounding Effect

Most founders evaluate dilution in isolation.

What they ignore:

ESOP pool expansion before Series A
Anti-dilution adjustments
Multiple bridge notes stacking

Illustrative Cap Table Shock

Assume:

Founders own 70% pre-bridge
Bridge converts at 14.29% (cap scenario above)
Series A investor takes 20%
ESOP expansion adds 10%

Post-round founder holding:

70% × (1 – 14.29%) × (1 – 20%) × (1 – 10%)

≈ 40–45% effective ownership

From 70% to mid-40s — without a down round.

Bridge math compounds silently.

3. Preference Stack: The Exit Waterfall Reality

CCPS typically carries a 1x liquidation preference, sometimes participating.

Consider this stack:

Bridge: ₹5 crore (1x preference)
Series A: ₹20 crore (1x preference)
Exit value: ₹40 crore

Waterfall:

Series A takes ₹20 crore
Bridge takes ₹5 crore
Remaining ₹15 crore distributed pro rata

If founders now hold 45%, their share from the residual pool:

₹15 crore × 45% = ₹6.75 crore

Total founder proceeds: ₹6.75 crore

Despite building the company, founders receive less than early investors in modest exits.

Now imagine participating preference — the distortion worsens.

4. Maturity Default — The Overlooked Trigger

Most CCPS bridge instruments include a maturity clause (18–24 months typical).

If no qualified financing occurs:

Automatic conversion at a predefined valuation (often punitive), or
Investor redemption rights, or
Enhanced preference multiples

If maturity conversion is linked to the valuation cap without a floor, founders face forced dilution even if no priced round materializes.

In stressed cases, investors negotiate:

Higher liquidation multiple (1.5x–2x), or
Board control rights

Bridge capital can quietly morph into leverage.

5. The Psychological Trap: “We’ll Fix It in Series A.”

Founders often rationalize:

“It’s only temporary dilution.”
“Next round will reset valuation.”

But caps and discounts lock in economic asymmetry before institutional pricing discipline arrives.

Once embedded, these rights survive future rounds unless renegotiated — which rarely happens when capital is scarce.

6. Practical Safeguards Founders Often Miss

Cap Discipline: Set the cap not merely as a negotiation midpoint, but aligned with realistic 18-month performance metrics.
Model Multiple Outcomes: Run at least three scenarios. (1) High valuation round; (2) Flat round; (3) Delayed/no round
Control Preference Stacking: Ensure later rounds are pari-passu where possible.
Avoid participating in preference in early bridge rounds.
Negotiate Maturity Language: Remove redemption rights if possible. Tie forced conversion to fair market value rather than cap-only mechanics.
Protect ESOP Dilution Timing: Clarify whether ESOP expansion is pre-money or post-money.

7. A Hard Truth About Bridge Rounds

Bridge rounds are rarely neutral instruments. They:

Front-load investor downside protection
Back-load founder dilution risk
Magnify modest exits through preference stacking.
Create governance leverage at maturity.

Mathematically, the investor secures a convex payoff; founders absorb linear dilution.

The asymmetry is structural — not accidental.

Final Thought

Bridge funding through CCPS is not just temporary capital. It is a built-in repricing mechanism wrapped in legal structure. Valuation caps and discount rates are not surface-level terms — they are embedded formulas that shift ownership depending on how the future unfolds. Founders who don’t model multiple scenarios often realize too late that the bridge wasn’t a path to Series A. It was a silent redistribution of equity.

Disclaimer

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