What should the maturity date of the convertible note be?

May 2, 2007

The maturity date probably should be related to the amount of time that the money will last or the anticipated date of the event to which the funds were meant to “bridge.”  The term “bridge” indicates that the loan is supposed to last until a specific event, like an equity financing or liquidity event.  VCs seem to cringe at bridge loans that are a “bridge to nowhere.”  As a practical matter, most companies will not have the funds to repay the loan at maturity, so the investors will generally continue to extend the maturity date instead of plunging the company into bankruptcy or taking other drastic actions.

Most bridge loans have maturity dates of less than one year.  Many early stage seed bridge loans seem to have relatively long maturity dates, such as six months to a year.  To satisfy the requirements of obtaining an exemption from the licensing requirements of the California Finance Lenders law, the maturity date of the bridge loan may be no longer than one year.  A longer bridge loan makes the exemption unavailable, but does not necessarily subject the lender to the licensing requirements.

Comments

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  • Snappy

    Woah, what are the requirements of the California Finance Lenders law? We issued a convertible note with a multi-year term and my California lawyer never mentioned any concerns.

  • http://www.startupcompanylawyer.com Yokum

    I suppose I should write a post about this since I’m speaking on a panel about bridge loans in August.

    See “What is the California Finance Lenders Law?

  • http://twitter.com/IanSimp Ian Simpson

    Are all convertible debt financing structures considered bridge loans?

  • http://www.startupcompanylawyer.com Yokum

    @Ian – in the past, convertible debt typically referred to bridge loans to “bridge” a company in between rounds of financing (in between Series A and Series B). Nowadays, most people think of convertible debt as a pre-Series A financing structure.

  • ConvertibleDebt Questions

    Question- what documents would be needed in order to extend the maturity date of a convertible note? Can it be done post-hoc if all investors agree? (i.e. maturity date is passed and they all want to stay in)