The Windsurf Dynamics: On the need for a social contract, an analysis of the potential payouts / cap table math, what a better outcome might have looked like instead, and why –– maybe? –– the Windsurf founders and board might have actually done the right thing, leaving a graceful path for the team.
I swear I wasn't aiming for a "twist" at the end, but I was literally researching and writing this step-by-step. I didn't rewrite it for new information, because I think all of it should be said anyway.
First, I want to debunk a couple of arguments I've heard today.
A. "This is consistent with waterfall / payouts according to the cap table like you'd see in an acquisition."
This is not a typical acquisition, for 2 reasons:
- usually in a "good" acquisition, all the employees go over to the acquirer + get new grants
- they are leaving the responsibility of a company that has been gutted of key employees and leadership, for the remaining employees to deal with
This is not a "bad" outcome, obviously; there's a lot of money to go around. But because this isn't a typical acquisition (but instead a licensing deal + distributions), the mechanism to pay out proceeds according to the cap table would only cover those with vested stock, i.e., employees who have been there for >1 year. The only way that any shorter-tenured employee left behind would be taken care of, would be because the founders / board went out of their way to bat for them.
A new type of exit requires a new set of norms and rules –– which we don't have yet.
B. "Yeah unvested stock didn't get paid out, so what? They're adhering to the contracts."
Candidates make a bunch of sacrifices by joining a startup. They are usually taking lower-than-market salary. They're taking a bunch of compensation in stock options, for the dream of a big outcome. They're taking a bet by leaving their prior jobs. They were ignoring the opportunity cost of other companies they could have joined, instead. They're probably working way harder than they would have at a public company, in exchange for impact and a stake in the outcome.
In return, founders make implicit and explicit promises: we're going to win or lose, together. You're going to have skin in the game. We're going to recognize contribution, performance, and growth.
This is a social contract: an understanding between people that transcends legal agreements. Bound and sealed with integrity, reputation, and duty of care. A sacred obligation between founders / execs and employees.
Any breach of the social contract is a really bad thing, because it hurts the startup ecosystem overall. Startups are a high-trust endeavor. A lot of deals are done based on handshakes and assumptions of mutual good faith. If that is damaged, it is devastating for the ecosystem at large. It introduces more legalese or hedging. Less camaraderie. More transactional behavior. Less willingness to stick with it when things get tough. Silicon Valley has escaped this malaise which has beset broader corporate America.
A cornerstone of this contract is founders, who sit at the intersection between investors, employees, and customers. There is an assumption that they'r'e critical to the stewardship of long-term, aligned behavior.
Not all founders will, obviously... there are certainly bad apples. But bad behavior usually arises in a bad scenario. When things are good, even selfish founders take care of others, because there's so much going around. Which brings us to...
Second, who's making what?
I have no insider intel. But I've spent thousands of hours in a past life looking at Delaware filings, and I know how to break down a company's capital structure. So please consider the below estimates to be a very educated guess. I have tried to indicate where I feel directionally confident about estimates vs. not.
A. Let's look at the current cap table. I'm reasonably confident that this section is in the right ballpark:
There are currently 180-190M shares on a fully-diluted basis (after some splits I'd assume). This includes
- Founder shares (estimate 80-90M or ~50%)
- VC preferred stock (estimate ~75M or ~40%)
- Employee option pool (estimate ~25M or ~13%)
VC preferred stock likely breaks down into:
- 15M Seed @ ~$0.20
- 15M Series A @ ~$1.50
- 20-25M Series B @ ~$3
- 20-25M Series C @ ~$6.50-7.00
Employee option pool likely breaks down into:
- 10M issued to early employees (say, first 30, those who started in 2021, 2022, or 2023) –– each grant of 500k-1M shares for first few, down to 50-200,000 for the last few. I would guess 50-75% of that has been vested.
- 5M issued to next wave of employees (say, next 100, those who started in 2024) –– each grant starting at 50-150,000 in early 2024, down to <50,000 in late 2024 after their $1.25B valuation. I would guess <20% of that has been vested.
- 10M more shares probably haven't been issued and are reserved in the option pool.
B. Let's look at the possible exit dynamics. I have no insight into this whatsoever, besides the above estimates + reasonable (widely ranged) estimates. Please consider this to be just a guess, for illustrative purposes, and NOT a statement of fact.
We know that this is mostly about the talent, so I'd guess that a good chunk –– say $400-800M of the proceeds –– would be reserved for new retention grants. Given "dozens" of people are going over, and going by the "$100M grants" for key people that Meta is promising, let's say that the two founders each get $100-200M, and the remaining 30(?) get $1M to $10M each depending on seniority. All of this would vest, of course –– probably over 4 years.
This means that the actual "exit price" would be much lower. If we think I'm anywhere close on the above figures, that would mean $1.6-2B was the portion of the exit price corresponding to the stock.
Given the founders have 80-90M (fully vested), VCs have 75M, and vested stock is 5-8M, that adds up to 160-175M shares total. That would work out to $9-12 / share, so
- Founders got $720M - 1.1B (plus retention grants)
- VCs got $700-900M (Seed ~$150M = ~50x; Series A ~$150M = ~7x; Series B ~$200-250M = 3-4x; Series C ~$200-250M = ~1.5x)
- Vested employees in total got maybe $50M (max $80M) –– heavily weighted towards first few employees who prob got $5-20M each. I'd assume that most of the early team, which would have skewed technical, is going over to Google as well (and receiving retention grants)
- Holders of unvested shares got nothing, as far as we can tell –– this would correspond to roughly 7-10M more shares.
Third, what should have been done differently?
The simple, reputation-optimal route here would have been to ensure that employees get compensated pro-rata to the issued equity as if they had been acquired, i.e., as if the stock had been accelerated to be fully vested.
This is roughly 7-10M shares, or let’s say $80-100M at the estimated exit share price.
This would have required reducing the proceeds to the stock by $80-100M. VCs make ~$30-40M less, founders make ~$50-60M less. At worst, the founders could have taken the $80-100M haircut by themselves, leaving it behind to make the employees whole. After all, they're making many, many multiples of this already. In fact, isn't it kind of odd that they didn't make sure to carve out this amount –– while large?
Wait...
They left Windsurf with $100M in the bank, and the remaining employees are the only remaining stockholders...
On the one hand, that figure reconciles with the company's fundraising ($240M raised, so $100M remaining from prior fundraising checks out).
On the other hand, it's awfully similar to the unvested equity.
And the company will be owned entirely by the remaining employees.
They no longer have a board / VCs. They have some customers but those contracts can be refunded / wound down in an orderly fashion. I’d guess most of their revenue is MRR not ARR so the refund is probably restricted to a handful of enterprise contracts. Netting out unearned customer funds still probably puts it in the $80-100M range, aligned with the unvested equity value. That's the amount that appears to have been "not taken care of."
Why... shouldn't the new management simply accelerate everyone's stock, pay out a stock dividend with the entire cash in the bank, and dissolve the company?
That would be essentially equivalent economics compared to the "right" path I laid out above.
If this is actually a possible path the founders & board left behind, they've actually done right by the team, considering the situation –– but, understandably, left the final decision to new management.
In fact, they could not tell the management team explicitly to take these actions; if shutting down the remaining company was the golden path and decided plan all along, it would look a lot like a straight-up acquisition, which is of course subject to FTC antitrust review. This entire structure, where an operating company is left behind, has emerged just to get around the stupid FTC regime we've seen over the last 5 years. But if the new management decides to dividend + dissolve the company, well then they're simply deciding to take appropriate fiduciary steps in the context of a "tough situation" and "competitive market where we don't see a path to creating meaningful enterprise value."
So... did the founders & board fail to look out for the team they’re leaving behind, or did they just leave the keys to the treasury, and trust new management to open the door? This story is full of layers. I have no idea, of course. I wasn't in the room. But the numbers seem to add up.
I'm guessing we'll find out a lot more over the coming days, and see if the final chapter is determined on a spreadsheet or by the social contract.
I swear I wasn't aiming for a "twist" at the end, but I was literally researching and writing this step-by-step. I didn't rewrite it for new information, because I think all of it should be said anyway.
First, I want to debunk a couple of arguments I've heard today.
A. "This is consistent with waterfall / payouts according to the cap table like you'd see in an acquisition."
This is not a typical acquisition, for 2 reasons:
- usually in a "good" acquisition, all the employees go over to the acquirer + get new grants
- they are leaving the responsibility of a company that has been gutted of key employees and leadership, for the remaining employees to deal with
This is not a "bad" outcome, obviously; there's a lot of money to go around. But because this isn't a typical acquisition (but instead a licensing deal + distributions), the mechanism to pay out proceeds according to the cap table would only cover those with vested stock, i.e., employees who have been there for >1 year. The only way that any shorter-tenured employee left behind would be taken care of, would be because the founders / board went out of their way to bat for them.
A new type of exit requires a new set of norms and rules –– which we don't have yet.
B. "Yeah unvested stock didn't get paid out, so what? They're adhering to the contracts."
Candidates make a bunch of sacrifices by joining a startup. They are usually taking lower-than-market salary. They're taking a bunch of compensation in stock options, for the dream of a big outcome. They're taking a bet by leaving their prior jobs. They were ignoring the opportunity cost of other companies they could have joined, instead. They're probably working way harder than they would have at a public company, in exchange for impact and a stake in the outcome.
In return, founders make implicit and explicit promises: we're going to win or lose, together. You're going to have skin in the game. We're going to recognize contribution, performance, and growth.
This is a social contract: an understanding between people that transcends legal agreements. Bound and sealed with integrity, reputation, and duty of care. A sacred obligation between founders / execs and employees.
Any breach of the social contract is a really bad thing, because it hurts the startup ecosystem overall. Startups are a high-trust endeavor. A lot of deals are done based on handshakes and assumptions of mutual good faith. If that is damaged, it is devastating for the ecosystem at large. It introduces more legalese or hedging. Less camaraderie. More transactional behavior. Less willingness to stick with it when things get tough. Silicon Valley has escaped this malaise which has beset broader corporate America.
A cornerstone of this contract is founders, who sit at the intersection between investors, employees, and customers. There is an assumption that they'r'e critical to the stewardship of long-term, aligned behavior.
Not all founders will, obviously... there are certainly bad apples. But bad behavior usually arises in a bad scenario. When things are good, even selfish founders take care of others, because there's so much going around. Which brings us to...
Second, who's making what?
I have no insider intel. But I've spent thousands of hours in a past life looking at Delaware filings, and I know how to break down a company's capital structure. So please consider the below estimates to be a very educated guess. I have tried to indicate where I feel directionally confident about estimates vs. not.
A. Let's look at the current cap table. I'm reasonably confident that this section is in the right ballpark:
There are currently 180-190M shares on a fully-diluted basis (after some splits I'd assume). This includes
- Founder shares (estimate 80-90M or ~50%)
- VC preferred stock (estimate ~75M or ~40%)
- Employee option pool (estimate ~25M or ~13%)
VC preferred stock likely breaks down into:
- 15M Seed @ ~$0.20
- 15M Series A @ ~$1.50
- 20-25M Series B @ ~$3
- 20-25M Series C @ ~$6.50-7.00
Employee option pool likely breaks down into:
- 10M issued to early employees (say, first 30, those who started in 2021, 2022, or 2023) –– each grant of 500k-1M shares for first few, down to 50-200,000 for the last few. I would guess 50-75% of that has been vested.
- 5M issued to next wave of employees (say, next 100, those who started in 2024) –– each grant starting at 50-150,000 in early 2024, down to <50,000 in late 2024 after their $1.25B valuation. I would guess <20% of that has been vested.
- 10M more shares probably haven't been issued and are reserved in the option pool.
B. Let's look at the possible exit dynamics. I have no insight into this whatsoever, besides the above estimates + reasonable (widely ranged) estimates. Please consider this to be just a guess, for illustrative purposes, and NOT a statement of fact.
We know that this is mostly about the talent, so I'd guess that a good chunk –– say $400-800M of the proceeds –– would be reserved for new retention grants. Given "dozens" of people are going over, and going by the "$100M grants" for key people that Meta is promising, let's say that the two founders each get $100-200M, and the remaining 30(?) get $1M to $10M each depending on seniority. All of this would vest, of course –– probably over 4 years.
This means that the actual "exit price" would be much lower. If we think I'm anywhere close on the above figures, that would mean $1.6-2B was the portion of the exit price corresponding to the stock.
Given the founders have 80-90M (fully vested), VCs have 75M, and vested stock is 5-8M, that adds up to 160-175M shares total. That would work out to $9-12 / share, so
- Founders got $720M - 1.1B (plus retention grants)
- VCs got $700-900M (Seed ~$150M = ~50x; Series A ~$150M = ~7x; Series B ~$200-250M = 3-4x; Series C ~$200-250M = ~1.5x)
- Vested employees in total got maybe $50M (max $80M) –– heavily weighted towards first few employees who prob got $5-20M each. I'd assume that most of the early team, which would have skewed technical, is going over to Google as well (and receiving retention grants)
- Holders of unvested shares got nothing, as far as we can tell –– this would correspond to roughly 7-10M more shares.
Third, what should have been done differently?
The simple, reputation-optimal route here would have been to ensure that employees get compensated pro-rata to the issued equity as if they had been acquired, i.e., as if the stock had been accelerated to be fully vested.
This is roughly 7-10M shares, or let’s say $80-100M at the estimated exit share price.
This would have required reducing the proceeds to the stock by $80-100M. VCs make ~$30-40M less, founders make ~$50-60M less. At worst, the founders could have taken the $80-100M haircut by themselves, leaving it behind to make the employees whole. After all, they're making many, many multiples of this already. In fact, isn't it kind of odd that they didn't make sure to carve out this amount –– while large?
Wait...
They left Windsurf with $100M in the bank, and the remaining employees are the only remaining stockholders...
On the one hand, that figure reconciles with the company's fundraising ($240M raised, so $100M remaining from prior fundraising checks out).
On the other hand, it's awfully similar to the unvested equity.
And the company will be owned entirely by the remaining employees.
They no longer have a board / VCs. They have some customers but those contracts can be refunded / wound down in an orderly fashion. I’d guess most of their revenue is MRR not ARR so the refund is probably restricted to a handful of enterprise contracts. Netting out unearned customer funds still probably puts it in the $80-100M range, aligned with the unvested equity value. That's the amount that appears to have been "not taken care of."
Why... shouldn't the new management simply accelerate everyone's stock, pay out a stock dividend with the entire cash in the bank, and dissolve the company?
That would be essentially equivalent economics compared to the "right" path I laid out above.
If this is actually a possible path the founders & board left behind, they've actually done right by the team, considering the situation –– but, understandably, left the final decision to new management.
In fact, they could not tell the management team explicitly to take these actions; if shutting down the remaining company was the golden path and decided plan all along, it would look a lot like a straight-up acquisition, which is of course subject to FTC antitrust review. This entire structure, where an operating company is left behind, has emerged just to get around the stupid FTC regime we've seen over the last 5 years. But if the new management decides to dividend + dissolve the company, well then they're simply deciding to take appropriate fiduciary steps in the context of a "tough situation" and "competitive market where we don't see a path to creating meaningful enterprise value."
So... did the founders & board fail to look out for the team they’re leaving behind, or did they just leave the keys to the treasury, and trust new management to open the door? This story is full of layers. I have no idea, of course. I wasn't in the room. But the numbers seem to add up.
I'm guessing we'll find out a lot more over the coming days, and see if the final chapter is determined on a spreadsheet or by the social contract.
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