When a convertible note maturity date arrives, the company has to do one of three things: repay the principal and accrued interest in cash, convert the balance into equity on the terms set out in the note, or negotiate an extension with the investors. Which path actually plays out depends on the note’s language, the company’s cash position, and what the investors are willing to accept. Most startups never pay the balance in cash, but the legal obligation is real, and ignoring the deadline creates default exposure that founders should take seriously.
What the Maturity Date Actually Is
The maturity date is the last day the note can remain outstanding as debt. A convertible note defers everything until that single deadline: no monthly payments, no interest checks, just one balloon payment of principal plus accrued interest. The date lives in the note purchase agreement and creates a hard contractual obligation.
In most deals the maturity date functions as a backstop rather than a repayment plan. Both sides expect the note to convert into equity during a future priced round long before maturity arrives. The deadline exists to protect the investor if that round never happens, and it’s the trigger that forces the three paths below into play.
Repaying the Note in Cash
If the note reaches maturity without converting, the company owes the full principal plus all accrued interest as a lump sum. Interest rates on early-stage convertible notes run between 4% and 8% annually and almost always accrue as simple interest. On a $100,000 note at 6% with an 18-month term, that adds roughly $9,000 to the balance due.
Cash repayment is rare in practice. A startup that hasn’t closed a priced round by maturity usually doesn’t have six or seven figures sitting in the bank for a payout, and investors know this going in. The repayment right functions more as leverage over conversion terms and extensions than as a realistic cash expectation. The obligation is still legally enforceable, though, and that’s where default comes in.
What Default Looks Like
Missing the maturity date without repaying, converting, or securing an extension puts the note into default. Two consequences appear in most agreements. First, the interest rate jumps. Some notes raise it to a fixed penalty rate, with figures running from 10% up to 22% depending on the terms.1U.S. Securities and Exchange Commission. Convertible Note Filing Second, the investor gains the right to accelerate the debt, meaning they can declare the full balance due immediately rather than waiting for the company to find its footing.2U.S. Securities and Exchange Commission. Convertible Notes Payable (Note 7)
If the note was issued as secured debt, a defaulting company risks having its assets seized. Even with unsecured notes, an investor who accelerates can sue for the balance. Early-stage investors rarely pursue aggressive collection because suing a portfolio company is expensive, recovers little from a cash-strapped startup, and damages the investor’s reputation in a community built on founder trust. Unlikely to sue is not the same as unable to sue, and the exposure is real.
Converting the Note Into Equity at Maturity
Many notes give the investor the right to convert the outstanding balance into equity at maturity instead of demanding cash. The distinction between automatic and elective conversion matters enormously here. Some notes convert automatically on the maturity date. Others give the investor a choice between demanding repayment and converting, with language like “at the discretion of the Holder” that makes conversion an election rather than a foregone conclusion.1U.S. Securities and Exchange Commission. Convertible Note Filing Read the actual note language. “Shall convert” and “may convert at the Holder’s election” produce very different outcomes.
How the Conversion Price Gets Set
At maturity, the conversion price is almost always determined by a valuation cap, a discount rate, or both, with the investor getting whichever produces more shares.
- A valuation cap sets a maximum company valuation for calculating the conversion price. If the cap is $5 million and the company’s actual valuation at conversion is $10 million, the investor’s shares are priced as though the company were worth $5 million, cutting the per-share price in half.
- A discount rate gives the investor a percentage reduction off the price per share paid by new investors in a future round. A 20% discount on $5.00 per share means the noteholder pays $4.00. Discounts in early-stage notes typically range from 15% to 25%.
At maturity without a priced round, there’s no new investor price for a discount to attach to. The note usually falls back on the valuation cap or a pre-negotiated fixed conversion price. Total shares issued equal the outstanding principal plus accrued interest divided by that conversion price. Once the shares are issued, the debt comes off the balance sheet and the investor becomes an equity holder.
What Shares the Investor Receives
Shares issued at maturity conversion are typically preferred stock, though the specific class and rights depend on the note. In a qualified financing conversion the noteholder usually receives the same preferred class sold to new investors, with its negotiated liquidation preference. At maturity without a priced round, the company may issue a simpler class of preferred, or in some cases common stock.
The liquidation preference matters because it determines payout order if the company is later sold or wound down. Preferred shareholders with a preference get paid before common holders, and the preference amount is usually tied to the original investment value that converted into those shares.3U.S. Securities and Exchange Commission. Exhibit 3.1 – Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock of Altimmune, Inc.
After issuing conversion shares, update the stock ledger and capitalization table. If the company doesn’t have enough authorized shares to cover the conversion, it will need to amend its articles of incorporation with the state, which involves a filing fee and board approval.
Extending the Maturity Date
Extensions are the most common outcome when a note hits maturity without converting. Neither side usually wants to force a cash repayment that could kill the company, and both sides prefer to keep the conversion option alive while a priced round stays in reach.
Extensions typically add six to twelve months to the original maturity date, though some stretch further. Investors have more leverage in this conversation than founders tend to realize, even when enforcement is impractical. An extension amendment is a chance for investors to renegotiate: a lower valuation cap, a higher interest rate going forward, additional conversion rights. Founders who wait until the final week before maturity to open the discussion tend to give up more ground than those who begin reaching out 60 to 90 days ahead.
How to Execute the Amendment
Start by pulling the convertible note purchase agreement and confirming three things: the exact maturity date, the stated interest rate, and the total outstanding balance including accrued interest. Getting these numbers wrong delays the amendment and erodes investor confidence.
Next, identify who needs to approve the change. Most note series define a “majority in interest,” meaning investors holding more than 50% of outstanding principal. Their signature binds all noteholders in that series, even those who didn’t sign. The exact threshold varies; some agreements set it at 50.1% and some require a supermajority, so check the specific note.
The amendment itself states the current outstanding balance, the new maturity date, and any other modified terms. The company’s board must authorize it, either through a formal meeting with recorded minutes or a written consent signed by all directors.4Practical Law. Board Resolutions Amending a Loan Agreement After board approval, send the amendment out for investor signature. Once the required majority signs, update the capitalization table and debt ledger to reflect the revised timeline. Those records feed into due diligence for your next fundraise, so clean entries save time later.
Forbearance When an Amendment Isn’t Workable
Sometimes a formal amendment isn’t feasible. Investors may disagree on new terms, or the company may already be past the maturity date before it starts addressing the situation. A forbearance agreement offers a middle path. Unlike an amendment, which changes the note’s terms, a forbearance is a separate agreement in which the investor agrees not to exercise default remedies for a defined period.5Justia. Forbearance Agreement Amendment to Convertible Promissory Notes
During the forbearance period, the note is not treated as in default for nonpayment, the investor won’t demand repayment or sue, and all other note provisions, including the investor’s conversion rights, stay fully intact. The original terms don’t change; the investor simply holds off on enforcement.
Forbearance is most useful when the company needs a short bridge and the investor wants to preserve existing rights without renegotiating the note. It’s faster to execute than a full amendment and doesn’t require majority-in-interest approval, since each investor enters into their own forbearance arrangement.
Tax Consequences at Maturity
Conversion triggers tax events on both sides that catch founders and investors off guard. The rules differ for the company and the investor.
For the Company
When a corporation issues its own stock to satisfy a debt, it generally doesn’t recognize taxable gain or loss on the exchange.6Office of the Law Revision Counsel. 26 USC 1032 – Exchange of Stock for Property But if the fair market value of the shares issued is less than the outstanding debt satisfied, the company is treated as having paid only the fair market value amount, and the difference can create taxable cancellation of debt income.7Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
There’s a practical escape valve for many startups. If the company is insolvent at the time of conversion, meaning liabilities exceed the fair market value of its assets, cancellation of debt income can be excluded from gross income up to the amount of insolvency.7Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Early-stage companies burning cash without significant revenue often meet this test, but don’t assume it without actually running the numbers.
For the Investor
When accrued interest converts into equity rather than being paid in cash, the investor has constructive receipt of that interest. The IRS treats you as having received the interest even though it arrived as stock. You owe income tax on the accrued interest in the year of conversion whether or not the company issues a 1099-INT. Your tax basis in the new shares includes the converted interest amount, which reduces your eventual capital gain on sale.
Investors planning to claim the qualified small business stock exclusion under Section 1202 should know the five-year holding period for shares acquired through debt conversion starts at conversion, not when the original note was issued.8Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain From Certain Small Business Stock The statute addresses stock-to-stock conversions, where the holding period of the original stock tacks on. Debt-to-equity conversion doesn’t get the same tacking benefit, so the clock resets.
One more tax point worth flagging at the issuance stage: if the note’s interest rate falls below the IRS’s applicable federal rate, the note can be treated as a below-market loan, which creates imputed interest income for the investor and a corresponding deduction for the company.9Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Setting the note’s stated rate at or above the AFR in effect at issuance avoids the issue.
Securities Filings Triggered by Extension or Conversion
Changes at maturity can trigger federal securities filing obligations founders overlook. Convertible notes are securities, typically issued under Regulation D’s Rule 506(b), which allows sales to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors without SEC registration.10eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
If the company filed a Form D notice of exempt offering when the notes were originally issued, a material change to the note terms, including an extended maturity date, requires filing a Form D amendment “as soon as practicable after the change.”11eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D The rule also requires an annual amendment if the offering remains open at each anniversary of the original filing.
When notes convert to equity, the company is issuing new securities. If the conversion was contemplated in the original offering documents and Form D, a separate filing may not be needed; converting into a new class of stock not covered by the original filing likely does require one. Confirm investor accreditation records remain current, since the exemption depends on selling only to qualified purchasers. A securities attorney should review any extension or conversion before execution to confirm the company is still inside its original exemption.