Event of default is a defined failure under a loan or credit agreement that entitles the lender to exercise remedies—accelerate all amounts due, charge default interest, foreclose on collateral, or block additional borrowing.

How it works

Credit agreements list events of default, commonly:

• Payment default — missing interest or principal
• Covenant breach — falling below minimum cash, revenue, or EBITDA thresholds
• Material adverse change — business deterioration (narrowly defined in good docs)
• Cross-default — default on other debt
• Misrepresentation — inaccurate info at closing

Venture debt often includes investor support covenants—default if qualified financing does not occur by a date. Waivers require negotiation; lenders may demand fees, tighter covenants, or board observer rights.

Upon default, lenders may accelerate the full balance—turning a manageable monthly payment into immediate demand for millions—forcing distressed M&A or emergency equity.

Example: company breaches minimum liquidity covenant at $3M cash vs $5M required. Lender declares event of default, blocks new draws, and threatens acceleration unless investors inject equity and covenant is cured via amendment.

Why it matters

• Founders: Read covenants before signing—not just rate and warrant coverage. Model downside quarters against covenant headroom.
• Investors: Equity holders often must rescue the company to protect their stake—debt sits senior to preferred in bankruptcy.
• Board: Fiduciary decisions accelerate when default looms—transparent lender communication beats surprise covenant trips.

Common mistake

Treating venture debt as “free money” because repayment feels distant. Covenants bite in downturns exactly when raising new equity is hardest—default transforms a capital tool into an existential clock.

Related ideas

• Venture debt — common source of default risk
• Covenant — ongoing financial promises to lenders
• Equity Kicker — lender upside separate from default remedies
• Distressed M&A — outcome when defaults force sale