I'm learning as much as possible about the funding mechanism of convertible notes. I understand that they are a loan until they convert to equity in the future once a more reasonable valuation is established. I realize they aren't given out to just everyone, and that companies who earn a convertible note are ones the investor believes will succeed based on team, product, etc. But some will still fail before their first round of funding. What happens to the convertible note?
It depends on how the note is written. If it is not guaranteed by any of the principles, it is treated just like any other debt. If the company has funds it pays it's liabilities, if there is any cash left it goes to the equity holders.
If it has been personally guaranteed, then whoever provided the guarantee is personally responsible to pay it regardless of what happens with the company.