Windsurf's Collapse: A Tale of Founder Betrayal

TL;DR

Windsurf's founders took a $2.4B Google deal, leaving 200+ employees with whiplash after their $3B OpenAI acquisition collapsed. A brutal lesson in startup loyalty and the dark side of the "acqui-hire." #VentureStep #AcquiHire #Tech

INTRODUCTION

Imagine you're on top of the world. ¹Your company is about to be acquired for $3 billion, and you're walking into a meeting expecting to celebrate a life-changing payday. ²Instead, the news is devastating: the deal is off. ³³Your CEO and top engineers have secretly taken a separate $2.4 billion deal, your company's IP has been licensed away, and you've been left with absolutely nothing to show for years of hard work. ⁴⁴

This isn't a hypothetical nightmare; it was the reality for over 200 employees at the AI coding startup, Windsurf. ⁵ In this episode, host Dalton Anderson unpacks the stunning collapse of Windsurf's acquisition by OpenAI and the subsequent firestorm. He explores the intense market pressures from AI giants like Anthropic, Google, and OpenAI that put Windsurf in a vulnerable position, forcing it to choose between a risky pivot or an acquisition. ⁶⁶

This is a story of ambition, betrayal, and the harsh realities of Silicon Valley. We'll examine how Microsoft's involvement derailed the initial deal 7, how Google executed a surprise "acqui-hire" that benefited only the top brass 8, and how the remaining employees were scooped up by Cognition under intense, hardball terms. 9It's a critical case study on leadership, loyalty, and what not to do when you hold the fate of your team in your hands. 10

KEY TAKEAWAYS

• Startups that are heavily reliant on the APIs of tech giants have an inherently vulnerable business model, as rising costs and direct competition can quickly erase their advantage. ¹¹¹¹
• The "acqui-hire"—where a large company buys a smaller one primarily for its talent and IP—is becoming a common strategy to bypass regulatory scrutiny and close deals faster. ¹²¹²
• A founder's decision to prioritize personal gain over their team's welfare can cause irreparable damage to their reputation, making it difficult to attract top talent in the future. ¹³¹³¹³
• Even multi-billion dollar deals that seem certain can be derailed at the last minute by the strategic interests of major investors, as seen with Microsoft's concerns over the OpenAI-Windsurf acquisition. ^14141414
• In high-pressure startup environments, the promise of a future payout in exchange for below-market salary and long hours is the core of the employee-founder contract; breaking that trust can stifle innovation. ¹⁵¹⁵¹⁵

FULL CONVERSATION

Dalton Anderson: Welcome to Venture Step Podcasts where we discuss entrepreneurship, industry trends, and the occasional book review. ¹⁶

Dalton Anderson: What happens when your $3 billion payday evaporates overnight? ¹⁷And you get news that that acquisition is no longer going through. ¹⁸Your CEO and other founding members and top engineers are leaving in a separate deal for $2.4 billion and your IP is no longer proprietary and they have unlimited access. ¹⁹ You're a gutted company. You're missing your CEO. You're missing your top talent. ²⁰ You have an interim CEO. You're out of probably like $20 million. ²¹And you got nothing. ²²

What happens when your $3 billion payday evaporates overnight? And you get a different news. You get news that that acquisition is no longer going through. ²³

Dalton Anderson: You thought you were coming to a meeting that announced the deal is done and it wasn't. ²⁴Actually, there's a separate deal now and you're not part of it. ²⁵You worked years, many long hours and you got nothing to show for it. ²⁶ You built something incredible, but people took what value you created, extracted it. They were paid handsomely for it and you got none of it. ²⁷ I'm sure in that scenario, you would feel pretty upset, disheartened and confused.

Dalton Anderson: And that's how the majority of the 250 employees at Windsurf felt when their original acquisition to OpenAI fell through. ²⁸They went to that all hands meeting with a new CEO announcing that the CEO has left the company, took the best talent, the top 40 employees and a $2.4 billion deal that they have no financial outcome from. ²⁹A lot of the employees were quite angry as they should be. ³⁰And that's the episode that we're going to be discussing today. ³¹

The High-Stakes World of AI Code Editors

Dalton Anderson: So we're to be talking about the background and market pressures that were happening at Windsurf. ³²Then we're going to dig into the acquisitions talks and why they fell through between OpenAI and Windsurf. ³³We'll talk about Microsoft's role in derailing the deal, Google's surprise $2.4 billion reverse acquire hire, Cognition's last minute rescue and hardball tactics, and then industry lessons on acquire hires and startups. ³⁴

Dalton Anderson: I find this topic interesting because it was also covered in my book reviews, like The Hard Things About Hard Things. ³⁵"If you're going to eat shit, don't nibble." ³⁶That's my favorite line from the book. ³⁷In that book, it discusses the foundations of being a CEO and a leader in a startup. ³⁸And the do's and don'ts, and one of them is to not turn your back on your team. ³⁹And that's something that was done in this process. ⁴⁰

Dalton Anderson: So we'll just talk about the market environment and the pressures that Windsurf was under. ⁴¹Windsurf is what's called a fork of VS code. ⁴²⁴²⁴²Basically, you took my homework, copied it, made some changes, and called it something else. ⁴³They took all the code, forked it, and then they put AI integrations into the code editor. ⁴⁴And from there, they created a company that turned out to be evaluated at $3 billion. ⁴⁵

Dalton Anderson: People primarily used models built by large companies. ⁴⁶The big three that were utilized were Anthropic's Sonic model, Google's Gemini model, and below that, OpenAI's model. ^47474747Anthropic has a really well respected coding model that a lot of developers like. ⁴⁸So Windsurf and another company called Cursor were basically just sending API requests to these large companies and owning their relationship with the customer. ⁴⁹

A Vulnerable Business Model at a Crossroads

Dalton Anderson: These big companies, let's call it the big three, were concerned because they are putting all this money into building their models, but they didn't own the customer in these scenarios. ⁵⁰And if they didn't own the relationship with the coder, then they are missing out on revenue and distribution. ⁵¹So they wanted to own the relationship directly. ⁵²

Dalton Anderson: What happened was the big three were concerned about not owning the relationship and the usage, so they raised prices. ⁵³The prices became uncompetitive for Cursor and Windsurf, so then they raised prices. ⁵⁴People were unhappy. ⁵⁵Then the big companies wanted to take it a step further by developing their own terminals, so they could be closer to the relationship of one of their key customers. ⁵⁶

Dalton Anderson: So when you think about it, if you are the CEO of Windsurf, you have two options. ⁵⁷You can pivot the company or you can get acquired. ⁵⁸If they went down the same route with their current approach, eventually they were going to die. ⁵⁹So they could keep building and acquiring customers and they could get acquired. ⁶⁰That was always the route that they were going to go down. ⁶¹

The $3 Billion OpenAI Deal and the Double Collar Clue

Dalton Anderson: What really happened is they got an offer for $3 billion from OpenAI. ⁶²There were rumors about this, and the rumors kind of started when the founder, Varun Mohan, was wearing a double collar on some podcast episodes. ⁶³He never wore a double collar before and Sam Altman was known in his early days to wear a double collar. ⁶⁴So people were like, what's up with that? ⁶⁵It was still just speculation at that point, but it pointed to an acquisition. ⁶⁶

Why Microsoft Derailed the OpenAI Acquisition

Dalton Anderson: Well, one of the issues is Microsoft is a key investor with OpenAI. ⁶⁷They also own the majority of the IP rights of OpenAI. ⁶⁸So they can license all of their proprietary models and rebrand it as a copilot or whatever they want to do. ⁶⁹And so they would have a contractual right to Windsurf. ⁷⁰The issue with that is Microsoft already had a competitor called GitHub Copilot. ⁷¹⁷¹⁷¹Microsoft owns VS Code, which Windsurf is a fork of, and they have a competitor, GitHub Copilot. ⁷²

Dalton Anderson: That doesn't bode well with regulations. ⁷³Microsoft had a concern that it would be seen as anti-competitive if a company they directly compete with was acquired for a large fee. ⁷⁴ So just Microsoft was like, hey, not really jiving with this. And so the deal broke down. ^75757575

Google's Surprise $2.4 Billion 'Acqui-Hire'

Dalton Anderson: So that deal falls through and that's a serious bummer. And then Google's like, this is a perfect opportunity. ⁷⁶It was a complete surprise actually. ⁷⁷ I expected the OpenAI deal to close. My response to why OpenAI would do it was it's more of an acquire-hire, a talent acquisition, than it is anything else. ⁷⁸

...having people that have scaled a company to a unicorn, like they're great people, they're self-sufficient, they're legit. And you can't just pluck those people out. ⁷⁹

Dalton Anderson: That deal falls through. It expires on Friday. 80I think the previous CEO, Varun Mohan, had a feeling that it was going to fall through and was doing some in-the-shadows negotiation with Google before the deal fell through. 81So when they were gonna have the all hands meeting, the current CEO was no longer the CEO and had moved on from the company and is now a higher-up at Google DeepMind. 82828282

The All-Hands Meeting That Shocked 210 Employees

Dalton Anderson: And they had some interim CEO that handled the all hands meeting. ⁸³The other 250 employees thought the deal was going to go through and they were all going to be millionaires. ⁸⁴ They're all pumped up and they're like, wait, hold on. Where's the CEO? ⁸⁵And then the interim CEO is like, Hey, by the way, the deal fell through. ⁸⁶Also our CEO and our top talent left the company in a $2.4 billion deal. ⁸⁷ They also licensed their IP. And you're not part of the deal at all. ⁸⁸Like a super big bummer. ⁸⁹ The 210 that are left are freaking out. They're crying. ⁹⁰ They're very aggressive and upset. Understandably so. ⁹¹

Cognition's Last-Minute Rescue and Hardball Tactics

Dalton Anderson: Over the weekend, Cognition, who is another AI agent company that has an AI agent called Devon, thought that it would be a good acquisition for them, to take over their enterprise contracts, Windsurf product and brand, and the employees. ⁹²⁹²⁹² That acquisition was for $250 million though. Big difference. ⁹³ But it's better than nothing, right? The company was just gonna fold. ⁹⁴No CEO, the main talent gone, leaders gone, company was just completely gutted. ⁹⁵So $250 million is kind of nice and it's such a deal for Cognition. ⁹⁶

Dalton Anderson: Circling back to the Google deal, it was $2.4 billion. ⁹⁷$1.2 billion for investors, $1.2 billion for founders and the key employees. ⁹⁸The investors gave back $100 million for how raw the deal was to the team of Windsurf. ⁹⁹So they gave them $100 million cash. ¹⁰⁰And then the founders and the key employees got $1.2 billion. ¹⁰¹

Dalton Anderson: The good thing about the Cognition deal was every employee was included in the vesting. ¹⁰²They waived all the cliffs. ¹⁰³They announced the layoffs three weeks later, they laid off 40 employees. ¹⁰⁴And then they sent out this very strong memo. ¹⁰⁵The memo was, hey, we're not a work-life balance shop. ¹⁰⁶We are a six-day in-office company and the expectation is to work 80-plus hour weeks. ¹⁰⁷ If you don't want to do that, that's fine. You can't work here though. ¹⁰⁸And we'll provide you with nine months salary. ¹⁰⁹

We're not a work-life balance shop... we are a six-day in-office company and the expectation is to work 80 plus hour weeks. And if you don't want to do that, that's fine. No hard feelings. You can't work here though. ¹¹⁰

A Generational Betrayal in Silicon Valley?

Dalton Anderson: One of the biggest things that I feel is just the complete disregard and disrespect of the team and the people you promised and you brought along with you as the CEO or founder to build something that incredible and then leave your team out to dry is unprecedented. ¹¹¹

These people have been referred to as generational villains. Varun Mohan and Douglas Chen have been referred to as generational villains because it goes against everything in Silicon Valley or everything against startup culture. ¹¹²

Dalton Anderson: It's like, hey, we work these long hours, you're gonna take below market salary, you're going to eventually potentially maybe get paid out. That's the promise. 113That's what everybody buys into. 114And for somebody to not include his team in the deal is just gross. 115A horrible thing to do. 116

Dalton Anderson: For somebody to take a deal, cut out everybody else that was rowing the boats with you is brutal. ¹¹⁷One, those folks, no one will ever work with those people again. ¹¹⁸ They're not to be trusted. They put their own self-interest above the team and they turned their back on everyone else. ¹¹⁹

Talented people, when they're making these decisions, that's really important to them. Character is super important. 120

Dalton Anderson: If you're gonna jump ship, the character of the person is super important. ¹²¹And I feel very strongly that the CEO and the two founders did everything they're not supposed to do. ¹²²Something like that cannot become the norm because then we would lose innovation. ¹²³People aren't willing to take risk if they know that they're not gonna get any of the benefits of it. ¹²⁴

The Problem with Acqui-Hires

Dalton Anderson: Another thing that's kind of becoming more common are these acquire hires. ¹²⁵To get away from regulations and approvals, instead of acquiring the whole company, they do these acquire hires to get around the regulations and to close deals faster. ¹²⁶The way that this was done with Windsurf is just a gut punch. ¹²⁷It allows the large company that's doing the acquisition to not have a lot of questions about the acquisition. ¹²⁸They literally are just acquiring the employees and licensing the technology. ¹²⁹

Dalton Anderson: Just to recap here. Windsurf was under incredible market pressure with raising API costs and product rollouts from the LLM producers. 130They had two choices, either pivot or get acquired. 131They chose to get acquired. 132That deal fell through with OpenAI due to Microsoft not feeling comfortable. 133Google swept in and acquired the top 40 employees, including the founders, and left the 210 other employees out to dry. 134Then Cognition acquired the employees for an estimated $250 million. 135Three weeks later, laid off 40 employees, then sent out a strongly worded letter about working 80-plus hours a week. 136

Dalton Anderson: The only real people who won out of this are the investors and the founders and then the top 40 employees. ¹³⁷Everyone else was left behind. ¹³⁸If that becomes the norm, as I mentioned, innovation is going to be stifled because none of these people are going to sign up for that gig. ¹³⁹

Dalton Anderson: I hope that you learned some stuff of what not to do if for some reason you're getting acquired for $2.4 billion and how you should treat your team and be a leader in those scenarios. ¹⁴⁰

RESOURCES MENTIONED

• Book: The Hard Thing About Hard Things ¹⁴¹
• Companies: Windsurf, OpenAI, Microsoft, Google, Google DeepMind, Anthropic, Cognition, Cursor, Salesforce ^{142142142142142142142142142142142142142142142142}
• Products: VS Code, GitHub Copilot, Devon ^{143143143143143143143143143}
• AI Models: Anthropic's Sonic model, Google's Gemini ^144144144144

INDEX OF CONCEPTS

Acqui-hire, Anthropic, Cognition, Cursor, Dalton Anderson, Devon, Douglas Chen, Elon Musk, fork (software), Gemini, GitHub Copilot, Google, Google DeepMind, Microsoft, OpenAI, Sam Altman, Salesforce, Silicon Valley, Sonic Model, The Hard Thing About Hard Things, Varun Mohan, VS Code, Windsurf