Convertible notes are loans and, like most loans, have a fixed maturity date at which point they are to be repaid with interest. These maturity dates vary, but typically are 18-24 months after the closing date. But what happens if the startup arrives at the maturity date and there hasn’t been a financing?
Repaying the amount borrowed, plus interest, is one option; though that is unlikely because the startup is probably cash poor. Defaulting on the note could lead to the investors to push the company into bankruptcy.
The most common solution is for the company to reach out to the investors before the notes matures and ask them for an extension of the maturity date. Whether they agree depends on number of factors, such as the startup’s prospects and market conditions, but granting an extension can be in their best interests and is often granted, sometimes for additional consideration. Note, this is a situation where it can be helpful for notes to include a “majority rules” provision. This allows for an amendment to the notes or waiver of their terms with the consent of the majority of the stakeholders.
If there hasn’t been a Series A round prior to the maturity date, startups could also convert the loan into shares of common stock or a new series of preferred stock at a predetermined price. Most investors don’t want to receive common stock, but if there is already a series of preferred stock that is outstanding and both sides can agree to a conversion price, allowing investors to convert their notes into preferred stock can also be a viable solution.
