One date on a term sheet that can quietly sink your startup

There is a single date, buried in the fine print of many startup financing documents, that can quietly determine whether a company survives. It's called the maturity date, and it belongs to one of the fastest and cheapest ways startups raise early money: the convertible note.

A convertible note is a loan that also carries the right to convert into stock later. Alejandro Cremades walks through why founders like them: they're quick to set up, requiring only two documents, and they typically cost a few thousand dollars in legal fees rather than the twenty thousand or more that a full equity round can run. Every convertible note carries three real ingredients worth understanding. There's interest, which accrues yearly on the amount invested until the company does an equity round and the debt converts. There's a discount, meaning the investor converts their debt into shares at a lower price than whatever valuation gets set in that next round. And there's a valuation cap, a ceiling that protects early investors from being diluted into irrelevance if the company's value suddenly goes through the roof.

The maturity date is the deadline by which the company must either have completed a qualifying round, converting the note into equity, or repay the loan outright. Cremades is unambiguous about the risk here: if that date arrives and neither has happened, the company is in default, and he has seen founders forced to shut down as a direct result. It's why he urges founders to feel genuinely confident, before signing, that they can close a real round before that date arrives.

Partly in response to exactly this risk, Y Combinator introduced an alternative called the SAFE, the Simple Agreement for Future Equity. It carries no interest and no maturity date at all, removing the two features of a convertible note most likely to work against a founder.

Cremades raises one more warning worth carrying into any negotiation: investment tranches, where an investor agrees to pay in installments rather than all at once. If an investor decides midway through, for whatever reason, that the business isn't performing well enough, they can simply stop paying, and there is little a founder can do about it that wouldn't cost more in legal fees than it's worth. A term sheet itself isn't a guarantee either; it's an invitation to begin due diligence, not a wired deposit, and founders who start spending as though the money has already landed sometimes find themselves shutting down when a deal quietly falls apart before signatures are ever exchanged.

Before signing any convertible note, find the maturity date and be honest with yourself about whether you can realistically close a qualifying round before it arrives, since missing it puts you in default. Where the terms allow it, consider a SAFE instead, since it removes both the interest and the maturity date that make standard convertible notes riskier for founders. If an investor proposes paying you in tranches rather than all at once, go in understanding they can stop midway with little you can do about it, and plan your spending accordingly. And treat a signed term sheet as the start of due diligence, not a deposit in your account, holding off on new spending or commitments until the money has actually arrived.