If you never intend to raise again after YC, I'm pretty sure that would be defrauding them. YC expects that you build VC-scale companies which require several rounds of additional funding, anything else is a failure, if I understand correctly.
You are getting downvoted to invisibility because YC doesn't ask you to raise again. You likely need to have the kind of company that could plausibly do so (ie, an idea that can scale), but lots of YC companies don't, and no YC process I'm aware of prods them to do so.
Not raising again doesn't even violate the expectations of the program.
Note on one point - technically it doesn’t require multiple rounds. For early investors, the fewer rounds before a large IPO, the better. If you made it huge and IPO’d as a billion+ dollar company with only the YC funds? YC would be thrilled
The reality is that is really really hard to do - harder even than doing it with extra funds - so it’s foolish to have that as your goal, or be tied to that. Especially since the decisions required to do that would almost certainly hamstring your ability to get market traction, grow as quickly as you otherwise would be able, etc.
YC, and most other investors, would much rather have 1% of a
$10bln company than 10% of a $100mln company.
It’s about perceived possibilities and decision making really.
Will someone be able or willing to make decisions which can result in x percent of a larger company, or will they require a larger percent of a company - and hamstring it, or stop it from growing.
Do you think the idea that popped into your head after reading this is something that didn't occur to them? A couple of YC companies have not raised additional VC rounds after YC.
I re-read the MFN SAFE contract. The second clause discusses "liquidity events." I.e., IPOs or selling the company. And discusses the details of that.
The only way around it would be to build the company after YC without further investment and to keep it private indefinitely, a la Gumroad, but given most company employees are also working partially for equity, that's generally a non-starter already. At that point, VCs usually make offers to the founders to buy back the equity for some amount to clear their books. I don't know if YC does this, though.
TL;DR The only way to not "convert" the $375k (this applies to the $125k SAFE too) would be to keep the company private forever which for most startups is a non-starter since employees generally want some equity.
Explicitly misrepresenting your intentions would be fraud though. I'm not talking about a company that intended to go big, but didn't quite take off. I'm talking about a founder who never intended to go big (keep a small bootstrapped company all the way), but applied to YC claiming big ambitions anyway, just to get the initial $500k check.
They already have exactly this issue (not that I think it's a big problem), if you apply to YC and convince them you want to build the next Slack, but in reality you just want a comfortable life for a few months, that's entirely possible already.
But since their entire business model is based on them being able to evaluate people, they probably don't think the risk of this kind of deception is too high.
For a lawsuit against a founder the reputation risk to YC is high. YC needs to keep their reputation for integrity high with their founders, and any lawsuit against a dishonest founder has a high risk of negative perceptions against YC with extremely costly outcomes for YC (regardless of how unfair that might be). Founders have enough worries without the added fear that YC might sue them.
Also the opportunity cost of chasing a lawsuit is high: I would expect YC to focus their resources on their successful investments instead.
That depends a whole lot on a lot of details not presented, I believe.
For instance - did the founder have an explicit plan to do this in advance? Did they materially misrepresent their intentions to the investor while having this plan, with the intent to receive funds they otherwise would not? Was the investor concretely harmed by this misrepresentation?
For instance if the investor still profited, it would be very difficult to argue fraud - not impossible of course. If the founder was thinking of this plan, but never wrote it down or said it to anyone, good luck proving fraud. If the founder had never been explicit to the investor, or was never asked by the investor what their plan was, so never materially misrepresented anything (even if the investor was clearly assuming), that would also be hard to argue fraud.
Especially so if the investor had a decent amount of wealth or experience.
This is why transparency - and due diligence - are so important for all parties. And why it’s important to not put all your eggs (or even most of them) in one basket. For everyone.
