Surfing Chaos
Windsurf proves startups are complicated for GenAI employees
Ever since the Windsurf debacle, I’ve found myself thinking even more about what the tech startup world is going to look like going forward.
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The problem I have with everything that happened relates to the employee situation. When people join an early-stage tech startup, usually they are pressured to negotiate a smaller salary in the expectation that a bigger payoff will happen later. That payoff event is referred to as the “exit.” The exit might be an acquisition by a bigger company, or it might be an IPO. Worst case (other than failure), the most significant Venture Capital (VC) investor merges smaller deals together that aren’t entirely failing but aren’t growing fast enough on their own. If that happens it probably won’t count as an exit and instead founders and employees will end up with a diluted position in the resulting entity.
However it happens, founders and those employees accepting the smaller salary eventually require an exit with enough money flying around or they won’t get that payoff. When it takes place, everybody is not an equal participant in the end game:
Founders and all the various employees will have different percentages of equity.
Employees might have options instead of equity. These won’t have any meaningful value unless the per-share exit price is above the options price.
Employees may have equity in different classes of common stock than the founders. This might put them in a different position for how payoffs are computed or what their respective positions mean for an IPO.
There may be vesting terms, where the employees aren’t able to benefit from that payoff until a certain period of time beginning from their employment date. If they quit or are fired before then, they may get nothing.
In the case of an IPO there may be additional requirements for founders and employees to not liquidate stock until a certain amount of time after the stock is first listed on the market.
Standing in front of founders and employees and expecting to get paid first are all the pre-IPO investors. They will have established legal status ensuring that they get paid first, or at least part of their payment happens first. The mechanism is referred to as an investor preference. The more series of funding rounds that took place, the more investor preferences there are standing in front of both the founders and all the non-founder employees. Like I said, it can take a lot of money flying around before you make that extra buck.
When the Windsurf deal with Google happened, the effect was to gut the company of key founders and R&D talent. I’ve been hunting and haven’t been able to find clear details on how that transaction took place, but since there hasn’t been news of lawsuits flying around it’s a pretty safe bet that the investors were all made whole with a reasonable profit. The founders and staff that moved to Google also would certainly have received something, or there would be no motivation to accept the deal.
That left all the remaining people sitting in the shell of a tech company. First they would have heard about a possible OpenAI deal, only to have their hopes crushed. Then Google appeared, and again their hopes were crushed. It had to have been a pretty brutal sequence of emotional let-downs. Fortunately in a market hot for talent with anything vaguely like an AI pulse, a last-minute deal happened where Cognition AI bought what was left.
To Cognition AI’s credit it sounds like they are doing something reasonable to honor the equity or option positions of the Windsurf staff. This does not appear to be a full exit though, as there has been no reporting indicating that the staff are getting fistfuls of cash. What apparently has happened is that they are back to square one, waiting on their exit. Now it’ll be the Cognition AI exit, instead of the Windsurf exit.
The only improvement in the employee situation I’ve found is that any previous vesting terms from Windsurf or any vesting policies of Cognition AI have been waved, and those employees are now fully vested. It was a reasonable adjustment, and Cognition AI deserves some kudos for it, but I don’t think it changes how the original Windsurf founders seemingly threw all of those people under the bus by denying them participation in an exit. It’s a reduction in damage, but in my opinion it is not a re-writing of history that unwinds what very much smells like a breach of trust. Whether done in intent, or done in an utter absence of fiduciary peripheral awareness of your team, that experience must have really stung for those left behind.
The tech startup world has an established history of grimy outcomes, so it isn’t like this is a new situation. What may be new, however, is the pace at which these take place in a GenAI world. I believe this is something all participants — founders, employees, and investors — need to begin planning around. I hope to get into the implications in future articles, so stay tuned.
The Experimentalist : Surfing Chaos © 2025 by Reid M. Pinchback is licensed under CC BY-SA 4.0