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What happens to the convertible promissory note if the maturity date is reached and there hasn’t been a financing?

April 29, 2007

The company could either (1) pay back the loan (which is unlikely since it is probably out of money), (2) ask the investors to extend the maturity date, (3) convert the loan into the last round of Preferred Stock (if any) at a pre-determined (i.e. last round) price (or price negotiated at the maturity date), or (4) convert the loan into Common Stock at a pre-determined price (or price negotiated at the maturity date). If the company can’t repay the note, then the investors could push the company into bankruptcy.

The typical situation when the maturity date is reached is for the company to talk to its investors and make sure that they don’t do anything drastic, like declaring an “event of default” on the note.

If there is already a series of Preferred Stock outstanding, then allowing the investors to convert at their option into the Preferred Stock is a good alternative, especially if the conversion price is agreeable to both the company and the investors.  As a practical matter, I think it is tougher to pre-negotiate a conversion price into common stock.

Sometimes aggressive investors will ask to control the board of directors or other things upon a payment default.

Written by Yokum · Filed Under Convertible note 

Comments

5 Responses to “What happens to the convertible promissory note if the maturity date is reached and there hasn’t been a financing?”

  1. Venture Hacks — [Hack] Supersize your debt with these microhacks on May 30th, 2007 11:17 pm

    [...] to equity—not the investors. This term lets the company avoid defaulting on the loan. See this great article by Yokum Taku for more [...]

  2. John on October 26th, 2007 2:31 pm

    Yokum, you have put together an excellent resource, thank you.

    Quick question: once the Company has closed the Series A, 3 months later the Company finalizes a Bridge Loan, but the Series B never happens. What are the technicalities involved in converting the Note into Series A? Do you simply amend your articles to allow for more shares of Series A and issue the amount at the same Series A share price that you had 15 months ago? What if the COmpany cannot obtain Shareholder approval for the amendment of the Articles?

  3. Yokum on October 26th, 2007 10:21 pm

    You need to amend the articles (certificate) of incorporation to authorize additional shares of Series A and common stock (for conversion of the Series A), if necessary. The conversion price (or amount of discount, if any) is subject to negotiation. If the company cannot get stockholder approval to amend the articles (certificate), then you have a problem.

  4. Jason on October 27th, 2007 8:04 am

    If the Company becomes highly successful quickly and opts not to raise Series A financing, what terms can be provisioned to duly reward Note investors for the risk?

  5. Yokum on October 30th, 2007 1:12 am

    See http://www.startupcompanylawyer.com/2007/05/01/what-happens-if-the-company-is-sold-after-the-convertible-bridge-note-is-issued-and-before-the-maturity-date-or-the-next-round-of-financing/

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