TLDR:
A tranche is a portion or slice of a larger financial transaction — such as a loan, bond issuance, or investment round — with specific characteristics like risk, maturity, or conditions distinct from other tranches.
In Venture Capital
Investors may release capital in tranches tied to milestone achievement rather than in a single upfront payment.
Tranche Structures in Practice
Milestone-based tranche financing is designed to reduce investor risk by linking capital deployment to demonstrated progress. Common milestones triggering subsequent tranches include: achievement of a specified ARR threshold, completion of a product development milestone, regulatory approval, launch in a new market, or reaching a certain number of customers. The specific milestones must be objectively measurable to avoid disputes about whether they’ve been met — vague milestones like ‘make significant progress on product’ are unenforceable and create conflict.