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.
