Y combinator - Everything you need to know about receiving US investment.

Naz Malik
Co-founder, Onfolk
5
minutes

Getting into an accelerator can change the trajectory of a startup. There’s no better than Y combinator. However, getting your financials to receive investment can be daunting. So here is everything you need to know.

Here’s Onfolks story.

Hey! I'm Naz from Onfolk 👋

Before getting accepted into Y combinator, Onfolk was a less than a year old UK limited company with no prior investment and barely any cash flow. We were so happy to be receiving the YC combinator deal. However, we soon learnt that many things needed to be done before we could receive the funds.

At one point, right in the middle of the program, it felt like we were asked hard to comprehend legal and financial questions almost every day. All the while, also doing our best to focus on growing our company, talking to investors and preparing for demo day.

The biggest challenge was having to flip our company, which means to create a top company to receive investment and make our UK company its subsidiary. We never had to deal with lawyers before and were distrustful of them, worried we would be ripped off.

I know Juan and Simon (Founders of Rebank) had the same experience, so when they asked me to be a guest writer and pick a topic other founders would find helpful, my first thought was what would have given me peace of mind to know before starting YC. Although this is from a UK company’s point of view, most of this applies to any startup with no initial investment entering any US accelerator.

Here's the information I wish I had.

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Choosing your parent jurisdiction.

Pre batch, YC legal team sent a form, which we filled in and returned.  They replied with:

"Next step is for you to work with a reputable lawyer with relevant expertise to create a parent company in a jurisdiction YC can invest in and flip your current entity into a subsidiary of that parent company."

In case you didn’t know.

  • "topco" means your "parent company".
  • "subco" is your "subsidiary company" (i.e. the UK company).

We researched the trade-offs of having a Cayman Topco. We also researched whether shutting down the UK company and incorporating a new US company from scratch was worth it.

We learnt:

  1. Cayman is simpler ongoing, but the problem is potential investor aversion. Also, it is less easy to set up bank accounts. Investor aversion is hard to gauge.
  2. Incorporating a new US company from scratch can get messy. This is because we'd have to 'sell' or transfer the IP from the old company to the new company. Even if your company hasn't done much, it still has IP. Not worth going down the rabbit hole.

After weeks of flip-flopping, we concluded that investor aversion is hard to gauge and not worth the risk. So, we do a Delaware Flip.

It ends up being a good decision, but a decision we should have made four weeks before.

Engage with a lawyer

Now that you’ve chosen a parent jurisdiction; you can engage with a lawyer. We engaged with lawyers one month into YC. We chose the law firm because someone who sounded like they knew what they were talking about said they were good, though expensive (plus time was ticking).

The lawyers give us a couple of questionnaires to fill in over email. They check our passports over a video call and send their "letter of engagement". This all takes another week before they start work on our flip.

In their questionnaire, there were questions like:

  1. Would you like us to reserve the name of your US entity for 60 days for a fee? → No.
  2. Who should hold the roles of "President and Chief Executive Officer", "Secretary", "Treasurer and Chief Financial Officer" in the US company → Done.
  3. Please confirm the accounting period end date - We align it with our UK company though we advise to make is 31st December, to align with US company year end.
  4. Please confirm the vesting schedule for your restricted stock → Don't try and get clever; go for the standard "Four-year vesting schedule with a one-year cliff."
  5. "Additionally, we commonly see companies include “double-trigger” vesting acceleration" → yes.
  6. Delaware tax regulations encourage a high number of outstanding shares. The critical figure for UK tax purposes is the proportion of issued shares (For my co-founder and me being a 50/50 split).The lawyers authorise 10,000,000 shares of Common Stock, reserving 1,000,000 shares in case we would like to create an employee stock option plan after formation. → I laugh as we previously had only 2 shares for the whole company.
  7. They ask for IP assignments. → I find ours on saved in SeedLegals. Plenty of templates there.
  8. They ask for our "statutory books". → I forward ours. You can check companies house if stuck.

Opening a US bank account

Hearing that Brex and Mercury only require an SS4 (an application for an EIN) to get a US bank account. We trust that we'll get the application in as soon as we're incorporated, and that's all we need.

The problem is, you can't submit an SS4 until you have a US company incorporated, which you’ll see why in a bit, won’t happen for a while yet.

By now, it’s the 2nd of July. Demo day is on the 29th of August, and we are due our first angel meeting on the 10th of August. Things are beginning to feel stressful.

Receiving Investment

We don't want to get blocked from issuing SAFEs, and we weren't sure at this stage if the YC deal stops you (It doesn’t). What does block you are not having your topco incorporated and having a bank account in your topco’s jurisdiction, either of which we still didn’t have.

Our lawyers let us know they’ve sent off the s138 letter. This is a form sent to HMRC for their clearance on certain tax elements of the flip transaction. It can and often does take up to 30 days to come back.

They ask us to complete an "Authorization for use of the Fax Signatures for Stock Certificates. This must be a wet ink signature," So make sure you have a printer on hand.

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Things started to heat up in August.

6 August

We receive s138 clearance. You need a witness to sign digitally.

10 August

Our lawyers tell us they have everything they need to incorporate our Delaware corp. They offer us a menu of fees to get it done between 5 business days and 30 mins.  We pay for it to be done in 24 hours. At this point, I ask for our bill so far, as I'm anxious we're being ripped off. Yikes! In hindsight, it doesn’t feel like a big deal anymore, but my advice is don't spend precious mental energy worrying about it as I did!

11 August

We get our certificate of incorporation as a Delaware corp. We flipped! 🎉

We don’t waste time submitting an SS4 application for an EIN to get a US bank account, meaning we can finally receive the YC investment. We use the Doola for $99 and submit the form. It’s worth it for the peace of mind that it gets submitted correctly.

We let YC know we've flipped and are ready to receive the investment. They ask for all our incorporation docs to review.

At the same time, our lawyers send us a letter with the following:

"Please find attached the stockholder consents to waive pre-emption over the stock associated with the YC/demo day SAFEs. You’ll note there are a couple of blank spaces left to be completed with the YC investing entity name, as well as the amount of funding Onfolk Inc, anticipates receiving. Please do let us know when this information becomes available, and we will amend it.”

The YC legal team offer to help; whilst they fill in some of the details, they tell us we should fill in the maximum amount we plan to raise in Demo Day SAFEs. At this point, I'm not sure exactly how much we'll raise from SAFEs, so I ask the YC legal team, and they suggest I put a number more significant than we expect to raise.

13 August

We have a US bank account! 🎉

I send the YC legal team our wire instructions.

We learn that we need to submit an 83b form within 30 days of our Delaware incorporation. You can choose not to submit your 83b. The complication is that if you end up being a tax resident in the US, you'll wish you had submitted it. Without the 83b, you may end up paying tax on the value of your shares at the time of an IPO/exit vs based on their value now.

17 August

Our first investor commits. 🎉

We want to issue a SAFE using Clerky, but they say we can't have access until the YC paperwork is finalised. The YC legal team haven't finished reviewing our docs, so we tell the investor we'll hopefully be ready to issue a SAFE within a week.

20 August

Now we have 4x committed investors.  🎉

Things are getting pressured, so we poke the YC legal team. They give us access to Clerky while they finish their review. Clerky's onboarding asks for an EIN (which we don’t have yet) and just put down “pending”.

Finally, they send us a "waiver for common stockholders."

"The Charter includes a right of the first offer on New Securities in Section 2- which means there needs to be a waiver from the common stockholders. I've included a template form of waiver; your lawyers can also help with this."

Although we have no previous investors, we the founders are the common stockholders. We complete the template form and confirm our waiver.

23 August

Our lawyers ask for an e-filing code "In order to make electronic filings with Companies House".  We forward it after checking ewf.companieshouse.gov.uk

24 August

We issue our first SAFE! 🎉

We have to do a "Board approval for SAFE financing” before issuing SAFEs. Its all very simple using Clerky.

27 August

Our YC money lands in our Mercury account! 🎉

Tying up loose ends

3 September

We finally send out our 83b forms, just in time for the deadline (10 September). It's a hassle because we learn that the forms must arrive before the 30-day deadline and be sent by post. We find the templates our lawyers had given us, write letters and our batchmate Pranav prints them out and posts them for us ⭐ Thanks, Pranav!

6 September

Clerky's customer support get in touch, saying:

"Though you completed special paperwork requesting that Clerky submit your company's California state securities compliance filing in connection with the securities issued to Y Combinator ES20, LLC, we were unable to submit your company's filing because of the Required Information indicated below is incomplete or invalid."

"We recommend your company work with its attorney to file a paper notice under the DFPI's hardship exception to its rules that require electronic filing. To file a paper notice, use the form and follow the instructions in the DFPI's Limited Offering Exemption Notice Packet. To be timely under the DFPI's rules, a notice must be filed or mailed no later than 15 calendar days after the date of an offering's first sale in California."

We send the California compliance filing issue to our lawyers, asking what to do. They resolve it instantly.

And breathe.... not just yet.

After contesting an invoice with our lawyers, we settle somewhere in the middle.

In November, Mercury get in touch and say they need our EIN by the next month or there might be restrictions on our account. So we phone the IRS and are on hold for over an hour, but they're really helpful and have it. At last we have our EIN! 🎉

Finally, in December, we get a US accountant (Socotax. Thanks, Kate Hiscox, for recommending them to us!). They put our mind at ease about many things.

Looking back, here are the big mistakes we made

  1. Not choosing a parent jurisdiction fast enough.
  2. Not engaging with a lawyer fast enough.
  3. Trying to be clever instead of getting our lawyers to do everything. If you have to think about it for more than 10 minutes, just send it to your lawyers. Just keep an eye on the fees!!
  4. YC legal are fantastic, but they're swamped. Please don’t get into a position where you need them to reply in a day because you left everything so late.
  5. I waited too long before getting a US accountant. It’s worth doing it sooner, not to have to worry about messing things up and upsetting the IRS.

One final thought ...

Y combinator was the greatest thing that happened to our company and we wouldn’t change anything. We highly recommend all founders to apply, and if you are lucky enough to get in, now you know what you’ll have to do to get that investment. Plus, now it’s $500,000!
Good luck!

Onfolk is the fastest way for UK startups to set up their payroll, HR, and pensions. Sign up and mention Rebank for 50% off your first 3 months.

Naz Malik
Co-founder, Onfolk

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