The maturity date is two years away, which is the longest possible unit of time in a seed-round conversation. By the time it arrives, everybody will have been very busy.
The shaded passages are from our fictional note, not verbatim Cooley clauses. Comments explain the trade, suggest a counterproposal, and translate our imaginary investor’s incentives. Structural references: Cooley’s CC0 Series Seed form; the tougher selected economics and fictional commentary are ours. An ask is not an agreed change or a guarantee you will get it.
Our fictional note matures on October 1, 2028. That date predicts no product launch or funding round. It gives the holder a contractual choice. Read the choices now, while the company still has time to negotiate them.
The arithmetic
| Time | Principal | Interest | Balance |
|---|---|---|---|
| At issue | $500,000 | $0 | $500,000 |
| 1 year | $500,000 | $40,000 | $540,000 |
| 2 years | $500,000 | $80,000 | $580,000 |
Swipe or scroll the table for all columns →
Illustrative arithmetic, not a forecast or transaction-specific advice. Definitions and exclusions appear in the specimen and accompanying text.
The $500,000 principal accrues $40,000 after one year and $80,000 after two under the specimen's simple-interest anniversary convention. The two-year balance is $580,000. Interest does not earn interest.
At the unchanged $1 cap price, maturity conversion issues 580,000 common shares. Against five million existing fully diluted shares, that is about 10.39% of 5.58 million shares before any new financing. Part II's priced-round percentage includes new-money shares; this one does not.
The actual ledger may change before maturity. The fixed cap does not freeze its denominator.
A repayment right is not a repayment source
Suppose Ordinary Machines has customers and $150,000 in the bank but no qualifying round. A $580,000 repayment demand has not solved that problem. It has given the company ten business days to confront it.
An extension, refinancing, conversion, or lawful restructuring may be possible. None follows automatically from a friendly investor relationship. Our maturity stock is common, without a promised preference; substituting preferred requires actual class terms and approvals.
The counterproposal below asks for time or a defined alternative, not an assumption that an investor will decline to use its rights.
A smaller round need not stop the clock
A funding announcement need not retire the loan
Without that election, the note remains outstanding and interest continues.
Read the full clause and its qualifications ↗
- What it means
- A preferred round below $2 million of new cash does not automatically clear this note. Majority Holders choose whether to treat it as qualifying. Converted notes do not count as new cash toward the threshold.
- Why it helps you
- A genuine funding threshold protects against forcing early investors into equity through a token round that leaves the company underfunded. Continuing the note may also be preferable to converting at a genuinely bad small-round price.
- Where it bites
- You can raise useful cash, celebrate, and still owe the old debt on the old maturity schedule. The next lead may want every note converted while the existing majority can decline.
- Ask for this
- Ask for a threshold that fits the actual financing plan, automatic conversion in a defined bona fide round, or a limited company election. Protect against a sham insider financing without making a realistic outside round too small to count.
Reduce the new-cash threshold to $1 million for a bona fide preferred financing led by an independent investor. Keep converted balances outside that cash test.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §§2.1–2.2 separate qualifying cash from converted instruments and offer holder elections for smaller rounds. Our $2 million threshold and this proposed alternative are invented economics. [1]
A $1 million cash financing plus $1 million of converting paper is not $2 million of new cash. Under this specimen it misses the threshold.
Without the majority's election, the note survives a smaller preferred round and keeps accruing interest. The business can gain runway while its maturity date remains completely punctual. A new lead seeking a clean capitalization now needs the old holder's agreement.
The threshold should fit a credible outside financing, with safeguards against a token round designed only to force conversion. Bigger is not automatically safer for the company.
You cannot always refinance your way to freedom
Repayment requires permission
Before or after maturity, the Company may not prepay without Majority Holder consent.
Read the full clause and its qualifications ↗
- What it means
- Even if you find cheaper money or become cash-generative, you cannot unilaterally retire this note. The holder has bought potential equity upside as well as a claim to repayment.
- Why it helps you
- Preserving that upside can persuade an investor to fund a risky company. A carefully priced restriction may be part of the bargain that makes the initial check available.
- Where it bites
- You may be able to afford repayment but unable to obtain consent, especially just before a valuable round. Our restriction continues after maturity, making it broader than a restriction limited to the pre-maturity period.
- Ask for this
- Ask for a defined repayment window, permitted refinancing, a consent-response deadline, or a specifically priced buyout. A response deadline alone is not deemed consent; say whether silence has a consequence.
Permit repayment after maturity on thirty days' notice unless holders elect the specified conversion within that period. Have counsel coordinate that election with the separate demand right.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §1.3 restricts prepayment prior to maturity. Our specimen expressly extends the restriction beyond maturity; this is not verbatim Cooley language. [1]
The holder bought the chance to convert into an interesting company. Repaying principal just before that company becomes interesting can deprive it of the upside. The consent restriction preserves that possibility.
A repayment window, documented conversion election, or priced buyout can resolve the conflict. Do not confuse a requirement to respond with an obligation to approve.
In our fictional board meeting, the CEO reports that the company can finally afford repayment. Counsel congratulates the CEO on the improved negotiating problem.
Default should describe an event
The missing spreadsheet can acquire a lawyer
A material breach of another obligation becomes a default only after written notice and thirty days to cure, where capable of cure.
Read the full clause and its qualifications ↗
- What it means
- A material reporting or other nonpayment breach can eventually support acceleration. Our specimen first requires notice and a cure opportunity where the problem is curable. The maturity-payment default uses a different ten-business-day period.
- Why it helps you
- Materiality, notice, and a workable cure period stop every minor administrative miss from immediately becoming a repayment demand. There is no added default interest or automatic sale premium in this specimen.
- Where it bites
- Adding discretionary defaults for anything the holder considers adverse can turn an operating disagreement into leverage over the whole balance. A cure right is useless if the company cannot perform the promised reporting or the cure demanded.
- Ask for this
- Ask for objective triggers, materiality, notice, realistic cure periods, and majority action for acceleration. Align reporting deadlines with your finance capacity. Reject a sale premium or punitive rate sneaking into the default section without a separate economic negotiation.
Retain written notice and a thirty-day cure for curable material breaches of obligations other than payment. No default based merely on missing a forecast; no added penalty rate or sale premium.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §4 supplies default and acceleration mechanics. Our material-breach provision for obligations other than payment and thirty-day cure are added example protections; they are not its published default language. [1]
Our material-breach cure protection is selected example language, not a copy of Cooley's default section.1 Notice, timing, the exact trigger, and the right to accelerate all matter.
Quarterly reporting within forty-five days is a promise someone must keep. Make sure the financial reporting and cure provisions can coexist in an actual early-stage business. A deadline is not easier to meet because the agreement is called simple.
Negotiate while the deadline is theoretical
Run the no-next-round case alongside the successful one. Identify who can extend maturity, whose vote counts, what stock arrives on conversion, and how much cash repayment needs.
An extension can benefit both sides. Discuss it while the company has alternatives, not after the final reminder.
The calendar has no objection to either party. It has only a date.
The deadline brings a creditor to the meeting
Read the full clause and its qualifications ↗
Use thirty-six-month maturity and a pre-agreed extension process with a workable notice period. If we instead choose automatic conversion, settle the complete conversion terms now.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley's opening repayment language and §2.3 expose repayment and maturity-conversion choices. The ten-business-day demand period and suggested extension structure are ours. [1]