Ask HN: Investor signed SAFE but stalls on wiring the money

[yolo101010]

Dear HN: An angel investor who came through an inbound intro signed a YC-standard template SAFE on favorable valuation with us where the expectation was the funds would be wired quickly. But after that the investor is stalling/deferring the wire by a couple of weeks, even as we go to raise at higher valuation from others.

What are our options as a startup at this point if we don't want to work with this investor ? The investor has a fully signed SAFE (after doing due diligence), but just hasn't sent the funds.

We have revoked that investor's access to even see our wire details at this point because we don't want to work with this investor if it can be avoided. So if this 'investor' is never able to actually send the funds in a far out future, what happens to that signed SAFE ? How does it get revoked or expire in the absence of funds being transferred ?

[clevy]

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!

[onphonenow]

Many other larger value transactions of this nature do have an execute by date actually baked in. So while no contract exists without consideration, a real estate, business acquisitions etc often have a closing date associated with the agreement (which can of course be modified). I've liked this on transaction side (not a lawyer). What are difficulties with having a time frame to perform within?

Ie, safe must be funded within 2 business days of date of safe. Can always do a new safe if the first doesn't go through and you still want to do business?

[yolo101010]

Amazing - thank you so much for this detailed and thoughtful response!

[jffry]

This is absolutely something to ask your lawyer. If you just leave this in limbo and hope it goes away, it could cause huge problems for you down the line.

In particular it might be problematic that you have actively worked to prevent the investor from paying you. You definitely need to talk to your lawyer about how to resolve this in a way that protects your company from an ugly, messy lawsuit down the road.

[nlh]

I am DEFINITELY not a lawyer so as others have said, talk to your counsel about this.

Having said that: The SAFE is a contract. The contract states in the first line "in exchange for the payment by [Investor Name]". If the investor doesn't make the payment, then the contract can be voided for cause. You should be able to give the investor notice that you are terminating the contract for cause (lack of payment).

But again, talk to your lawyer.

[yodon]

Some years ago, I witnessed a situation where a predatory investor signed a contract with a firm which obligated the firm to immediately start meeting commitments without specifying the date by which the investor was obligated to provide the promised funds.

The investor never transferred the funds to the company, using what they knew about the company's cash-flow situation to purposely drive the target company into bankruptcy to gain control of the company's assets (and past payment stream, but that's another story) in bankruptcy court using preferential terms guaranteed them in the contract.

[thecleaner]

Name and shame ?

[throwaway_au_1]

I don't know of the scenario that the above poster is speaking of, but it is believed/speculated that Harley Davidson did something similar to Alta Motors (electric motorcycles) inside the last 2-3 years.

[zanzibar735]

You have a lawyer right? Ask your lawyer.

[pluc]

Free legal advice from Internet strangers is the best kind of legal advice (unless you plan on using it)

[javert]

Everybody is saying "ask your lawyer." Good advice, but lawyers can be wrong. You know who's seen this a million times before and isn't going to be wrong? YC. So this is a valid question, assuming OP gets a response from actual YC people and not just internet randos.

[nathanyz]

Agreed, given that the SAFE originated from YC, and apparently as a mechanism for easy financing to be used by startups. It would be interesting to hear their take on why a time limit for wiring of funds wasn't included, and also what their interpretation of this would be.

Of course with all of the normal, this is our opinion, but you should still ask your lawyer, etc disclosures. Having a shared understanding given the popularity of the SAFE's paperwork would be good for all founders who are using it or considering using it.

[yolo101010]

Thank you - yes, exactly. Waiting for that..

"Hire a lawyer" isn't a real option for us. Besides the $ cost, there is the time and the reputation cost as well.

Curious to see how have others managed situations where investor signed SAFE but did not wire the funds promptly ?

[phonebanshee]

I'm shocked that you think having a lawyer involves reputation costs.

[schnebbau]

I know the answer is "consult your lawyer", but as a curious bystander it would be interesting to get others' take on this based on likely variables.

[zxexz]

Somebody on HN might know, but with something like this you really should seek legal counsel. From a lawyer. Best of luck.

[onphonenow]

Without consideration there is usually no agreement.

Normally the SAFE is dated on or about the time of the wire transfer

Talk to a lawyer. My guess is you could let them know that a safe is issued in return for funding and given they did not fund promptly you've elected to go elsewhere.

Probably be good if the safe was updated (void after 5 business days if no funding received) to be explicit for everyone.

[pierrefermat1]

I'm really surprised there are not any time limits in the contract to start with, as it seems by this case hypothetical they can postpone wiring indefinitely and only wire if the company actually takes off.

[jordanf]

Hiring a lawyer for this is the most correct and least expensive solution.

[ekanes]

Seems like SAFEs should be updated to include timeouts if money isn't sent within X days.

[thrill]

Drop him, permanently. Be and demand ethical behavior.

[gerikson]

Is the investor from Russia?

[smoyer]

I can't tell if this was a serious question but the OP should seriously consider whether the money behind their investor might be coming from Russia. But they should also consider whether the current events have distracted this investor with more pressing needs.

[gerikson]

It is a serious question.

Sanctions on the scale we are seeing now are basically unprecedented. An entire G20 nation is cut off from the global economy.

[smoyer]

Thanks for clarifying!

This is a bit OT but I've been pondering the sanctions and concluded that Putin (if he's still alive) and the Russian oligarchs should continued to be sanctioned even when Russia itself rejoins the world community. How do we rebuild the Russian economy while keeping these people from regaining power?

[Annatar]

Lawyer up!

[spacemanmatt]

Hit the gym!