What happens to convertible notes at maturity?
FundraisingConvertible notesCompliance
Most convertible notes never do the thing their maturity date threatens. When the date arrives without a priced round, the company asks the holders to extend it and they nearly always do, because the company cannot repay and the investors did not lend in order to be repaid. A note's majority-rules clause, which lets holders of a majority of the principal amend every note, is what makes that one email rather than a negotiation with each investor. If the company is sold first, the notes are repaid with a premium or converted at the cap, and the buyer needs to know about them early. If the next round is too small to count as a qualified financing, the holders have to agree to convert anyway. Each of these has a SAFE answer as well, because a SAFE avoids some of them entirely.
Notes on the cap table
You do not know how many shares they will become until the round prices, so notes usually sit in a separate ledger rather than on the cap table proper: holder, principal, date, and the interest accruing. Keep it in the same spreadsheet or platform as the cap table so the pro forma for the round has everything. SAFEs sit in the same ledger without the interest column.
Rolling closes
Yes. Notes and SAFEs are built for rolling closes: each investor signs their own instrument on the day their money arrives. The discipline is to group investors into dated closings, because a closing date is the only deadline an undecided angel responds to, and to be honest with an investor who commits $100,000 toward a $1 million target if the target is not going to be reached.
A round below the qualified financing threshold
Then the notes do not convert automatically, and the new investors will not close with debt sitting ahead of their preferred stock and an unknown number of shares waiting to appear. So the company asks the note holders to agree to convert anyway, as a condition of the round. They usually do, on the same cap and discount. A post-money SAFE converts on any preferred stock round, so it does not have this problem.
A sale before the round
A note says what happens in a sale, usually a choice between being repaid with a premium and converting at the cap into the shares that are being bought. In a small acquisition, and especially an acqui-hire where the buyer wants the team and little else, the cash on offer may not cover the notes. Raise it with the buyer and the holders early, because a buyer who learns of $2 million of notes late in diligence will take it out of the price or walk. A SAFE gives the holder the greater of their money back or their converted shares, which is the same conversation in simpler form.
Holders who are not repaid
In theory a past-due note is a debt, and a creditor with a past-due debt can sue on it. In practice early stage investors almost never do, because the cost of chasing a company with no cash exceeds anything they would recover and it ends the relationships they invested in. Notes are unsecured unless one says otherwise, so a bank loan with a lien comes first in a failure. If an investor asks for a security interest over the company's assets in a seed note, that is unusual enough to talk to a lawyer about before agreeing.
A second note round
Yes, either by extending the first round on the same terms, which may need the existing holders' consent, or by opening a new round on new terms, which usually does not. If the company has made progress, the second round should have a higher cap. Tell the first-round investors either way; they are the people most likely to fill it.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.