Default occurs when a borrower violates the terms of a credit agreement — typically by missing payments, breaking covenants, or triggering cross-default clauses linked to other obligations.

How it works

Loan documents define events of default: payment default, covenant breach, material adverse change, insolvency filings, change of control without consent, and false representations.

Remedies escalate from default interest and fees to acceleration (entire balance due immediately), blocking new draws, enforcing personal guarantees, or pushing toward bankruptcy.

Venture debt often includes investor support covenants — lenders expect lead investors to back the company or refinance. Without that support, technical defaults happen even when the product is growing.

Defaults differ from delinquency (late but cured) and technical default (covenant miss without missed payment). Waivers and amendments are common in workouts if sponsors inject equity.

Equity holders usually rank last in recovery once default leads to liquidation or cramdown restructuring.

Why it matters

• Founders: Monitor covenant cushions and communicate early with lenders. Surprise defaults destroy negotiating leverage.
• Investors: Debt in the stack can force down rounds or wipe common. Model default scenarios before approving venture debt at the portfolio company.

Common mistake

Assuming lenders will always extend and amend. Without a credible equity cure or growth plan, lenders protect capital aggressively.

Related ideas

See also event of default, default alive, forbearance agreement, and workout.