'This breaks the Silicon Valley social contract:' The whipsawing of Windsurf employees has left a bitter taste in tech

Varun Mohan is the founder of Windsurf, which made an unusual deal with Google after talks with OpenAI fell apart.20VC/YouTubeGoogle's unusual deal with Windsurf has left some with a bitter taste in Silicon Valley.Some Windsurf investors have also been critical of the deal.More deals like this could be on the horizon, which concerns VCs and founders.Windsurf's path to a $3 billion acquisition by OpenAI looked like a startup fairytale — until the deal fell through, setting off a whirlwind of last-minute negotiations that left employees grappling with uncertainty, and a company split in two.The unusual dismantling of the company into separate parts of haves and have-nots has left a bitter taste for some in Silicon Valley."This breaks the Silicon Valley social contract," said Amjad Masad, CEO of Replit, a competitor to Windsurf. "This is bad for startup employees. They're going to be less likely to join startups. What's the point of joining a startup and working your ass off if you might get screwed?"It was only a few weeks ago that the kind of life-changing event early startup employees dream about happened at Windsurf: OpenAI announced it was buying the AI-powered coding startup for $3 billion.When he read the news, Dave Pack, a Los Angeles startup founder, opened a group chat and congratulated his friend who works at Windsurf, whom he declined to name. He joked that with his friend's sudden change in net worth, he could afford to foot the bill for their next guys' trip."I was really excited for him," Pack said. "He's pretty senior, so it's not like he had a small chunk of equity. When you join a company and it gets acquired for $3 billion, that's for the history books. That's a giant success in this industry."It was not to be.Discussions with OpenAI fizzled, and there was a new suitor: Google. But instead of acquiring Windsurf, Google said it would pay $2.4 billion to hire its CEO and top talent and license the company's intellectual property. The hundreds of employees who remained at Windsurf were left adrift until last Monday, when Cognition sent a life raft in the form of buying what remains of the company."It was some of the most insane 72 hours I've seen in startup land," said Maor Fridman, a general partner at F2.Windsurf's new CEO, Jeff Wang, took to X over the weekend to share details on the frenzied 48 hours it took for Windsurf to figure out a path forward after the OpenAI deal and to hash out the acquisition by Cognition."It was my job to explain to the company our path forward," Wang, who was formerly the company's head of business, wrote in a post on X."The mood was very bleak," Wang wrote. "Some people were upset about financial outcomes or colleagues leaving, while others were worried about the future. A few were in tears."Terms were not disclosed, though the Cognition deal appears to be far lower than what OpenAI originally offered. Three sources estimated Cognition, which itself is only worth $4 billion, paid about $300 million in stock.Spokespeople for Windsurf and Google declined to comment. Varun Mohan, the cofounder of Windsurf who is now part of Google; Scott Wu, cofounder and CEO of Cognition; and Jeff Wang, Windsurf's new CEO, all did not respond to requests for comment.Cognition said "100% of Windsurf employees will participate financially" in the deal and "they will also have all vesting cliffs waived and will receive fully accelerated vesting for their work to date."The last-ditch deal was a far better outcome for employees than many feared after the Google acquisition, but some VCs feel that the transaction sets a dangerous precedent."It's a pretty sad place to be," said Deedy Das, an investor at Menlo Ventures. "When you join a company, you expect decisions to be made together, so this does have a chilling effect on founding team members.""Windsurf and others are really bad examples of founders leaving their teams behind and not even sharing the proceeds with their team," wrote storied investor Vinod Khosla on X. "I definitely would not work with their founders next time."Traditionally, early employees are willing to accept less cash and more equity while working 100-hour weeks in the hope that they will share in the upside should their company be acquired someday."If an exit can happen and you don't participate in it, that's pretty bad for startup employees," said Masad. "It's just broadly bad for the startup ecosystem for these deals to be financially engineered in this way."After the Google deal, Masad took to X to offer an olive branch, inviting Windsurf employees to decamp to Replit."If you were part of Windsurf and got left behind, we'd like to talk," he wrote. "We've passed on many acquisitions over the years, and any liquidity has always included employees." (Masad said he's still having "conversations" with some employees, but most have chosen to go to Cognition.)Some Windsurf investors have also been critical of the deal. While they are happy to get some return on their investment, it's hardly the venture-style outcome they hoped for."The problem is that the company technically didn't actually fully realize that decacorn potential, which was the reason we invested in them," said Krish Ramadurai, a partner at AIX Ventures, referring to a startup worth more than $10 billion. "We would've preferred to just take a clean exit from OpenAI. That was a nice, very simple acquisition. Now this is a bit of a fucking mess."Ramadurai is also unsettled by what the deal means for the future of the company and its employees."Their mojo gets thrown in the blender," Ramadurai said. "The key leaders and the engineers that get poached are all stoked, but everybody else that's left behind is in this weird purgatory situation because they have to maintain the momentum even though they lost the key talent in the leadership."More similar deals to come?What happened at Windsurf follows other unusually structured deals for Character AI, Inflection, and Scale AI, where Big Tech companies avoided outright acquiring a company in order to gain access to its founders and top AI researchers.In the case of Scale AI, Meta paid $14 billion for a 49 percent stake in the data labeling company and hired its founder, Alexandr Wang, to run its Superintelligence group. Meta also hired some of the startup's researchers. Last week, Scale AI laid off 14% of its workforce, or 200 employees, and revealed it is unprofitable.Every transaction is different, and in the case of Windsurf, the company was not seen as having conventionally elite AI talent."Google sees Windsurf as an autonomous software engineer —an AI that's as productive as an elite full-stack team, or maybe even a department," said Danny Pantuso, an investor at Mucker Capital. "Through that lens, Google's license fee resembles an upfront payment for permanent access to this capability, similar to Microsoft's deal with OpenAI."What all these deals have in common is that they can close quickly and avoid regulatory scrutiny — two benefits that mean this type of transaction is only going to become more common, according to Steve Brotman, managing partner at Alpha Partners."This isn't a one-off, it's part of a broader pattern where Big Tech hedges its bets," Brotman said. "Licensing is faster, cheaper, and less political than full-on acquisitions, especially in an environment where regulatory scrutiny is intense."For startup employees, that makes it more important than ever to make sure they are joining the right company, according to Jake Saper, a general partner at Emergence Capital."Startups with unique data feeds, embedded distribution or clear recurring revenue have leverage to stay independent," Saper said. "If a company's main asset is a brilliant but portable research team, you should assume Big Tech will come knocking."Read the original article on Business Insider

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