I had a convertible note with an investor that was coming up on the maturity date. The investor decided to exercise an optional conversion at a valuation that we both agreed upon. He signed a Subscription Agreement purchasing units of our company as well as our LLC Operating Agreement solidifying him as a member of the LLC. The investor is not an accredited investor but certified in the agreement that he is a sophisticated investor and has all the information and knowledge he needs to make a decision. The investor is also a lawyer. In addition, no advertising or solicitation was used; the investor approached us after hearing about our company through a friend. We are based in MD, he is based in PA. We have his money already because of the previous convertible note agreement. However, he sent me an e-mail a couple days after signing saying that he formally rescinds the agreement and wants to just extend the note a few months to have more time to think about it, have more discussions, and potentially renegotiate.
The technical legal answer is unless your subscription agreement or convertible note allowed for some type of rescission right, a contract was formed when he executed the subscription doc that generally can't be unilaterally rescinded.
From a business and relationship standpoint, you may want to allow him to rescind anyway. As an entrepreneur myself who's raised outside capital for my own company and helped other companies raise capital, I've learned you don't want investors on your cap table that aren't advocates of your company, or who may cause problems or take too much of your time. This is somewhat unique since he already holds a convertible note and has money in your company whether he converts or not. You have to determine what effect enforcing the contract will have on his relationship with your company and whether it will do more damage than good. Have you tried having a meeting or call with him to talk through and understand his concerns?
Answered 7 years ago