YC legal team here: first, we agree that if you have legal counsel, you should get their advice on how to handle. Second, other startups have had this happen to them and it's typically easily resolvable.
The first line of the safe states "in exchange for payment by [Investor] of [$], on or about [date of safe] ... ." We drafted this line specifically to ensure that the parties understand that money MUST be exchanged for the safe to be valid. Without payment there is no "consideration," which means there is no valid contract.
We decided that picking a hard date for "expiration" of an unfunded safe creates its own set of problems, so the safe is effective "on or about" the same date it is signed. Opinions can differ on the distance between "on" and "about," but we think its reasonable that "on or about" means just 1-2 days. Investors should not be signing safes if they don't have the money to invest within that time frame.
A suggested course of action for OP's situation is to send the investor a written notice that the safe is terminated because there was no exchange of money on or about the date the safe was signed, as provided in safe. Take steps to ensure the notice is sent to whatever contact addresses you have for the investor (email, physical, email of the investor's legal counsel (if there is one). Keep a copy of the written termination notice and proof that it was sent.
Then probably best not to do business with that investor again!
It's fine that you aren't incorporated yet, and I'm glad you waited! Many applicants have not formed a legal entity when they apply. If you are accepted in the S17 batch, we will help you incorporate in the US.
Y Combinator purchases common stock - approximately 6%. Y Combinator has a fund, called YCVC Fund I, that purchases a safe equal to 1% of the company (at the time of issuance of the safe). The safe is typically convertible into shares of the issuer's preferred stock (but could convert to common stock in a merger, for example). So between the two YC entities, that's 6% in common stock and 1% in a convertible security that will most likely turn into preferred stock. Hope that helps clarify!
We look for great founders and great ideas, regardless of geography. BUT...if you get accepted, your company will have to convert into a US domestic corporation (preferably Delaware). So forming your entity now in Europe or North America may end up being a waste of time and effort.
Re question 1: you read correctly. An investor just get its money back in a change of control. An investor using this form of safe would have to be very confident that the safe would be amended to match a later safe with better terms. To be perfectly honest, this form of safe may not be very popular for this reason, but uncapped notes with an MFN clause have been popular, so we decided to have a safe like that too.
Re question 2: if the company has drafted its IRA to exclude the safe holders from pro rata rights, then the company must give those rights via side letter instead. Many investors feel very strongly about pro rata rights, so we drafted the safe to ensure that the company had to give them, but with some flexibility as to where (e.g., in a side letter rather than in an IRA).
The SAFE Preferred Stock would be whatever you end up calling it in the charter - for example, Series AA (just something to differentiate it from the preferred stock being issued to the new money investors). So no, you would not actually call it "SAFE Preferred Stock" in your COI. Does that make sense?
Sorry, DenisM. Investors in the Silicon Valley find notes very acceptable. It is not only YC companies that raise early money on notes, many other companies do too. Notes may be the most popular in SV, but I am sure that investors in other places use them as well. I think maybe you just got unlucky.
I think with this idea you end up back at the note concept; what you are proposing sounds more like a loan / debt to me (if I understand you correctly?). The purpose of the safe, anyway, is to turn investors into stockholders at some point.
The notes have proliferated because they are quick and easy (no transaction costs, etc.) so it's the way many startups like to raise money. Priced rounds are fine too - they just tend to take more time and involve costs. YC and others have open-sourced streamlined equity financing documents, but so far, nothing has been as easy as raising on a convertible note.
This is a high class problem to have! As mentioned above, this seemed to us to be an extreme corner case. To remain simple, we tried not to draft for every scenario (which was hard, believe me - lawyers do this by nature). It may require some patience on the part of the safe holder, but odds are that eventually a company will have a liquidity event.
A company that never has one of the qualifying events is likely to be an extreme corner case. So an investor could end up holding a safe for a while, but for the vast majority of companies, there will be a financing or a merger / acquisition at some (or an IPO).
Correct - the notes had this feature too, except that rather than shadow preferred, it was the preferred / common "unit" concept. The net result was the same.
Great question. Re: the implied valuation of the company, I don't believe it will be different from the notes. The safe will convert to preferred stock, and while the price of the preferred stock certainly affects the price of the common, I think it would be hard to say that a prospective valuation for an event in the future increases immediately increases the value of the common stock.
The first line of the safe states "in exchange for payment by [Investor] of [$], on or about [date of safe] ... ." We drafted this line specifically to ensure that the parties understand that money MUST be exchanged for the safe to be valid. Without payment there is no "consideration," which means there is no valid contract.
We decided that picking a hard date for "expiration" of an unfunded safe creates its own set of problems, so the safe is effective "on or about" the same date it is signed. Opinions can differ on the distance between "on" and "about," but we think its reasonable that "on or about" means just 1-2 days. Investors should not be signing safes if they don't have the money to invest within that time frame.
A suggested course of action for OP's situation is to send the investor a written notice that the safe is terminated because there was no exchange of money on or about the date the safe was signed, as provided in safe. Take steps to ensure the notice is sent to whatever contact addresses you have for the investor (email, physical, email of the investor's legal counsel (if there is one). Keep a copy of the written termination notice and proof that it was sent.
Then probably best not to do business with that investor again!