THE WINDSURF STORY: FROM BILLION-DOLLAR DREAMS TO FOUNDER BACKLASH

E77 THE WINDSURF STORY_ FROM BILLION-DOLLAR DREAMS TO FOUNDER BACKLASH

Transcript

Dalton Anderson (00:00.398) Welcome to Venture Step Podcasts where we discuss entrepreneurship, industry trends, and the occasional book review. 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. Your 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. And so you're a gutted company. You're missing your CEO. You're missing your top talent. And so you have an interim CEO. You're out of probably like 20 billion, sorry, $20 million. And you got nothing. You're on top of the world.

and you thought you were coming to a meeting that announced the deal is done and it wasn't. Actually, there's a separate deal now and you're not part of it. And you worked years, many long hours and you got nothing to show for it. 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.

I'm sure in that scenario, you would feel pretty upset, disheartened and confused. And that's how the majority of the 250 employees at Windsurf felt when their original acquisition of

Dalton Anderson (01:54.422) themselves to open AI fell through and they 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 are no part, that they have no financial outcome going to them. And a lot of the employees were quite angry as they should be.

And that's the episode that we're going to be discussing today. So we're to be talking about the background and market pressures that were happening at Windsurf. Then we're going to dig into the acquisitions talks and why they fell through between OpenAI and Windsurf. And then we're going to talk about Microsoft's role in derailing the deal. Google's surprise $2.4 billion reverse acquire hire.

Cognitions, the last minute rescue and hardball tactics that they employed on the surviving employees. And then industry lessons on acquire hires and startups. I'm not an expert in startups, but I find this interesting, find this topic interesting because it was also covered in the high growth startup. And then it was also covered in the most recent episode of my book reviews, I think I'm about to do another book review, but.

the hard things about hard things.

If you're going to eat shit, don't nibble. That's my favorite line from the book. That's what the episode's called. In that book, it discusses. The foundations of being a CEO and being a leader and like a startup. And the do's and don'ts, and one of them is to turn your back on your team. And that's something that was done. Obviously in this in this process, so.

Dalton Anderson (03:58.511) A lot of things not to do.

Anyways, my name's Dalton Anderson. I'm your host. I like to code, I work in insurance, I run, I read books, I do all sorts of things and I also record episodes on a weekly basis. If you like these episodes, feel free to tune in and subscribe, like, do whatever. No, no requirements here. I'm just chilling. I'm just glad to have somebody listen. Besides myself and my mom and maybe Nana. But anyways.

Okay, so we'll just talk about the market environment and just the pressures that Windsurf are under. And if you aren't familiar with this whole thing, I'll provide a quick overview and so you'll know exactly what's going on. So Windsurf is what's called a fork of VS code. Basically, just think about it as you took my homework, copied it, made some changes to it, and you called it something else.

kind of what a fork is. So they took all the code, they forked it, and then they put AI integrations into the code editor, the idle. And then from there, they created a company and that company turned out to be evaluated at $3 billion originally. And the closing was 2.4 and then another acquisition of 250. So I guess if you just want to make it

Super simple, you call it three billion.

Dalton Anderson (05:33.739) In that scenario, they took homework, as I mentioned in this analogy, copied it, added some extra stuff, the coding stuff, like the AI agent. And basically the AI agent, they have their own model, but mainly people used models built by large companies. And the big three that were utilized in probably order of importance was Anthropix Sonic model.

Geminis. What is it? Gemini.

Not the pro. It's the, it's not the pro. It's the one below the pro. I think it's called like the blitz. I don't know. I'm messing up. Just, just, just roll with it. Gemini's model. And then below that is opening as model. Anthropic has a really well respected coding model that a lot of developers like. It performs very well and it's great. And so the company windsurf and

another company called cursor were basically just sending API requests to these large companies. And then they were owning their relationship with the customer. And then they were also building their own models. And so these big companies, the just call it the big three, we're kind of concerned because they are putting all this money into building their models, but they didn't own the customer in these scenarios. And one of the key customers in their mind are

technical folks, especially coders. And so if they didn't own the relationship with the coder, then they are missing out on revenue and distribution and future products that they could serve to this, this customer base. And so they wanted to own the relationship directly. And so they rolled out like these coding terminals. Basically you give the, you give your

Dalton Anderson (07:39.15) You give the company permissions to run stuff through your terminal via API, and then you can give it access to your files. And then it also is able to do actions independently for you on your coding files or whatever you're trying to do. It's pretty neat and can get pretty expensive pretty quickly. But in a general sense, how it went was big three was concerned about not owning the relationship.

and the usage, they raised prices. Prices kind of became uncompetitive for Cursor and Windsurf. So then they raised prices. People were unhappy. Cursor had really confusing prices. Windsurf was still trying to acquire folks. And sidebar, I've never met anybody who actually used Windsurf. So I don't know. And then there's conferences where people ask like, hey, raise your hand if you use.

Cursor, raise your hand if you use Windsor. And I've seen videos where people just in the whole crowd, like everyone's a cursor or VS code, and then no one raises their hand, like maybe it's two people for Windsor. So I'm not actually sure who uses their product, but that's a sidebar.

before we get derailed.

They raised prices and then they wanted to take it a step further by developing Claude in Terminal, Jim and I in Terminal.

Dalton Anderson (09:10.443) Open AI and Terminal so they can be closer to the relationship of one of their key customers.

So when you think about it, right, you are the CEO of Windsor. You have two options. You have option one, you can pivot the company or you can get acquired. Those are your two options. If they went down the same route with their current approach, eventually they were going to die.

or they could keep building and acquiring customers and they could get acquired. And this is always going to be a long-term process, not a long-term process of getting acquired, but I think that was always the route that they were going to go down. Like they're like, eventually we're going have to get acquired by one of these companies. And it could be any of them. Doesn't really care as long as it's a multi-billion dollar acquisition.

Dalton Anderson (10:17.699) which is fine if everyone benefits. And then you'll find out later the whole scenario of how it all rolled out.

Dalton Anderson (10:27.065) but I wanted to make sure that you understood the market pressures that when surf was under and then the two routes that they had. So route one, they could pivot and they already have a team that built a product with $80 million in recurring revenue and made it a unicorn. So they've got talent or they could get acquired and that seemed like the easiest route because they've already got a great product. They've got

They've got enterprise customers. They've got plenty of revenue. And if you were going to pivot, you kind of have to pivot with some kind of specialized Delta team without taking too many resources away from the current team or with the current team finding out that you're working on something else before it's ready because then the team will, the team that will cast doubt on your current missions and create.

Dalton Anderson (11:25.935) created like a lack of morale or optimism on the company's direction. Like why do we have to pivot? Like why is our current route not good enough? And so you don't want that happen. So if you're gonna pivot, you kind of have to secretly pivot until it's ready and then pivot. But if you just say, all right guys, we're gonna start over everything. We're starting out everything from scratch. That doesn't go very well.

with a lot of folks, anyways. So they had a vulnerable business model. They were at this crossroad.

And what really happened is they got an offer for $3 billion from OpenAI. So there was rumors about this and the rumors kind of started when the founder

Varun Mohan was wearing double collar on some of these podcast episodes. And he never wore double collar before and Sam Altman was known in his early days to wear a double collar. It was like one of his styles, like his style gestures and mannerisms.

So he's wearing these double collars and people are like, what's up with that? And we were like, okay, well, it's probably opening eye related. And then there was rumors plus the double collar. And I was like, all right, this is confirmed here. This is kind of a confirmed acquisition. Nothing was public. was still, it was still just speculation at that point.

Dalton Anderson (13:16.751) peer circulation just from the double caller stuff and some of other stuff that was leaked. Well, one of the issues is Microsoft is a key investor with OpenAI and what that means in their kind of terms is they have, if OpenAI were to go,

I guess, guess pivot from nonprofit to for-profit. Microsoft would get a large share of the profits until they were paid back. And then they also own the IP rights or majority of the IP rights of OpenAI. So they can license all of their proprietary models and different things at their company and rebrand it as a copilot or whatever they want to do. And so they would have a contractual right to windsurfer.

or sorry, Windsurf. And the issue with that is Microsoft already had a competitor called GitHub Copilot. And so Microsoft owns VS Code, which is a fork of Windsurf, and they have a competitor, GitHub Copilot.

And that doesn't bode well with regulations. so Microsoft had a concern that it would be seen as anti-competitive if a company that they can directly compete with was acquired for a large fee. And then the company that they also invested in and they're some semi-competitive towards each other, OpenAI and Microsoft, had full rights over their competitor that they just got acquired.

And so just Microsoft was like, Hey, not really jiving with this. And opening out was like, fine. It doesn't need to be part of the rights of like when we acquire this company, it's not part of your rights. Like you don't own this, but it's still caused a lot of questions and Microsoft wasn't very comfortable with the whole scenarios that open AI was.

Dalton Anderson (15:25.552) suggesting how it would play out. And so the deal broke down. And another thing to add is Microsoft's not too happy with OpenAI as of recent, and the CEO has publicly sub-shaded, basically like shading on OpenAI and Sam without explicitly saying so, but it's sub-adding.

company. And if you don't know what mean, it's, it's basically talking smack without actually referencing or talking smack about it's simple as translation. So that deal falls through and that's a serious bummer. And then Google's like, this is a perfect opportunity. We need some more talent. We need to compete. And so there was somewhat of a rumor actually

If I recall correctly, no, there was no rumor. It was like a complete surprise actually. Like I expected the OpenAI deal to close. Everyone was like, when's this closing? There was a lot of complaints about like, why does this deal even make sense? You know, they can easily build this. Like they already have stuff that's similar. They could just do that. And my response was it's more of an

acquire higher where there are, it's, more of an acquisition, talent acquisition higher than it is anything else. And having people that have scaled a company to a unicorn, like they're great people, they're self-sufficient, they're, they're legit. And you can't just pluck those people out. Those people are good and they'll leave to start another company or they could improve your company quite a bit.

So that's what OpenAI was doing. I assume. I don't know why they would need windsurf.

Dalton Anderson (17:30.704) If the acquisition was purely windsurf, it wouldn't make any sense at all. But then that deal falls through. It expires on Friday. And I think that the current CEO or the previous CEO who was. Varan Mohan had a feeling that it was going to fall through and was doing some kind of.

in the shadows negotiation with Google before the deal fall through. And so when they were gonna have the all hands meeting, the current CEO was no longer the CEO and had moved on from the company is now a higher at Google, DeepMind. And then they had some interim CEO that handled the all hands meeting. And the other 250 employees thought that

the deal was going to go through and they were all going to be millionaires. You know, each person might get, you know, five, like five, 10, 20 million, maybe a couple of million. I I would take, I would take two mill. That's fine with me. Give me two mill. And so they're all pumped up and they're like, wait, hold on. What's going on? Where's the CEO? And then the, the interim CEO is like, Hey, by the way, the deal fell through. Also our CEO and our top talent left the company.

in a $2.4 billion deal. And they also licensed their IP. And you're not part of the deal at all.

Like a super big bummer. Like that's a bummer for sure. So the current employees, that's the 210 that are left, freaking out. They're crying. They're very aggressive and upset. Understandably so.

Dalton Anderson (19:26.65) And then...

Dalton Anderson (19:30.725) That was the closing of the meeting. And then over the weekend.

Dalton Anderson (19:37.955) Over the weekend, Cognition, who is another AI agent company that has an AI agent called Devon, that company thought that it would be a good

Dalton Anderson (19:54.14) good acquisition for them, take over their enterprise contracts, windsurf product and brand, and the employees.

That acquisition was for 250 million though. Big difference. And.

Dalton Anderson (20:16.465) It's just a roller coaster. It's better than nothing, right? The company was just gonna fold. No CEO, all the talent, not all the talent, but the main talent gone, leaders gone, company was just completely gutted. So 250 million is kind of nice and it's such a deal for Cognition. But circling back to the Google deal, the Google deal was $2.4 billion.

1.2 billion for investors, 1.2 billion for founders and the key employees. The 1.2 billion that went to investors, investors gave back $100 million to, I guess donated, donated $100 million for how raw the deal was to the team of Windsurf. So they gave them $100 million cash. So here's your.

Here's your coffer, your war chest to survive. Figure it out. And then they took the 1.1.

and went on their merry way, all making hundreds of percent returns. And then the founders and the key employees got 1.2 billion. The founders took the majority of that acquisition. And then the rest was spread around to the 40 employees.

I don't know how much the exact amount was for the cognition deal. It's estimated to be 250 million. It's not publicly disclosed, but that's what the estimates are on what the acquisition was. And that acquisition was for the 210 employees left.

Dalton Anderson (22:05.293) And every employee, good thing about this deal was every employee was included in the vesting. So they're they're waived all the cliffs. They announced the layoffs three weeks later, they laid off 40 employees. So that. That left them with.

70 employees in the acquisition. And then they sent out this very strong memo. And the memo was, hey, we're not a work-life balance shop. And I know you didn't sign up for this and you weren't hired by us, but we are a six-day in-office company and the expectation is to work eight hour plus weeks.

And if you don't want to do that, that's fine. No, no hard feelings. You can't work here though. And we'll provide you with nine months salary.

Six days of the week in the office is pretty hardcore if you didn't sign up for that. And so I don't know how many employees took that deal versus how many stayed, but I'm sure quite a few did similar to how when Elon Musk did his acquisition of X, he was like, I demand, I demand a lot more than what you guys are given or were expected to give. We're okay with you leaving. That's fine.

And I think like half of the employees left, which was quite a bit because it was thousands. And that also might because they don't support his political stances or the things that he's been doing politically, but he was less involved when his first acquisition of X. But pretty sure he started getting more involved because he was forced to acquire X. Regardless, don't know how many employees took up on the deal.

Dalton Anderson (24:12.54) That was how it all went down. 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

It's unprecedented. These people have been referred to as generational villains. Farhan Mahan and Douglas Chen have been referred to as generational villains because it goes against everything in Silicon Valley or everything against startup culture. 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 money and that's the promise. That's what everybody buys into. That's the no fluff, this is what we signed up for. And then for somebody to not include his team in the deal.

is just gross. Gross. It's a horrible thing to do. Horrible. Horrible thing. And...

Dalton Anderson (25:50.78) trying to put it in words.

Dalton Anderson (25:58.483) It's kind of hard to say, but I would think about it as, if you built a company and it's valued at multiple billions of dollars, and it's not that old, but it's old enough, and you devoted such an amount of energy and life force to the company, and transferred it to the company.

It feels like you are part of the company, right? Like everyone's part of the company. You're building a day in, day out. You're taking feedback. Everyone's working together. Everyone's working hard, rowing the boats. And I've done that in a pseudo manner at my current job. And for

somebody to take a deal, cut out everybody else that was rowing the boats with you is brutal, brutal. And I think there's a couple things that would really hold true on this. One, those folks, no one will ever work with those people again. They're not to be trusted. They put their own self-interest above the team and

They turn their back on everyone else. They turn their back on 210 people that put their blood, sweat and tears into the company.

Dalton Anderson (27:31.322) and it seems like they don't really have an issue with it.

Dalton Anderson (27:37.01) And if I was in that same scenario where I was probably gonna make out with 600 million and then cut my whole team out.

I would try to pivot. I would not take that deal. And the reason why I wouldn't take that deal, and I wasn't in that scenario, so it's easy for me to say I would do things differently. I get that. But you gotta think about it this way. If you take that 1.2, you split it between your other co-founder and maybe of that 1.2 billion, maybe you get 800 million, and so it's 400, 400, depending on the split, whatever. And then the 200 million goes to the other 40.

Please.

That is fine. You're making a killing there. But what about the rest of your life? Those founders, they're not very old. They're 28, 30. I don't know their exact age, but I know that I read an article and they were 28 when they were talking about the acquisition. So maybe they're 29 now. They've got their whole life ahead of them. And they might not work at Google DeepMind the rest of their life.

assure you that the investors were happy, everyone else not so much. And if I were going to jump my secure fluffy job to go and work at a startup and the previous founders cut their team out of a two point four million dollar deal, left them to dry and just made out like bandits while they just gutted the whole company.

Dalton Anderson (29:20.016) I'm not going to work for that person. And talented people, when they're making these decisions, that's really important to them.

Character is super important.

all the time, but at a big company, you can get away with being a little shitty. But if it's just you and four other people, five other people, and then you slowly grow up as a company, those are big decisions. And the person you're hanging out with all the time is a big deal. And I'm not saying it's not a big deal at a big company, but you can get away with it.

If you're gonna jump ship, the character of the person is super important. And I feel very strongly that the CEO and the founder group, and the two founders.

They did everything they're not supposed to do.

Dalton Anderson (30:25.062) And something like that cannot become the norm because then we would lose innovation. People aren't willing to take risk if they know that they're not gonna get any of the benefits of it. And if you're not taking risks, you're not innovating. And if we're not innovating, we fall behind. And so I don't wanna fall behind. And the way that you don't do that is you don't do stuff like that.

horrible thing for them to leave their team behind like that. And another thing that's kind of becoming more common are these acquire hires. So Google, Microsoft, more Google, Microsoft than, or like Salesforce type of company, than Anthropic. I haven't really read about many acquires, large profile acquisitions from Anthropic. I know they have some, but

It's not like they're just buying up companies as much as these other folks. But to 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.

And normally you'd take more of the employees. It doesn't have to be everybody, but like the way that this is done with Windsurf is just a gut punch. But it allows the large company that's doing the acquisition to not have a lot of questions about the acquisition. So,

Dalton Anderson (32:21.106) They're not competing against the company. They're not acquiring the company. They literally are just acquiring the employees and licensing the technology. Everything else is held the same. They're a separate entity. They don't own them. They don't interact with them. They're acquiring key talent and the IP, which makes it simple for the large company because they're just licensing the technology and they got some of their employees. That's it.

Dalton Anderson (32:53.404) But yeah, just don't do it like, not opening it, but windsurf. It's tough. Just to recap here. Windsurf was under incredible market pressure with raising API costs and product rollouts from the people offering the actual product, the LLM producers, like the big three that I mentioned earlier, Anthropic, Google.

OpenAI.

Then they had two choices, either pivot or acquire, get acquired.

They chose to get acquired, it seems, and three billion is good amount. That deal fell through with OpenAI due to Microsoft not feeling comfortable with the acquisition. Google swept in and acquired the top 40 employees, including the founders and the current CEO, who was also founder, and then left the 210 other employees out to dry.

Then there was another deal struck, Cognition, who for an undisclosed fee, estimated to be $250 million, acquired the employees. Three weeks later, laid off 40 employees, then sent out a strongly worded letter saying, hey, if you don't wanna work 80 plus hours a week and six days a week in the office, take nine months severance and be on your way.

Dalton Anderson (34:30.074) That's how it all went down.

Dalton Anderson (34:36.038) And the only real people who won out of this are the investors and the founders and then the top 40 employees. But everyone else was left behind in my opinion. I mean, it's good to get acquired, but just the way it all went down, as I said, is just not the way you want things to become. that, if 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.

that it's not a good gig to sign up for, especially when you got a family, a partner. Just not a good situation.

So I don't know if you found that story interesting. 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.

If you have any commentary on what happened, please let me know in the comments. And of course, wherever you are today, good evening, good afternoon, good morning. Thank you for listening and thank you for listening. And I hope you listen in next week. See ya. Goodbye. Toodaloo.