A new kind of deal is forced to wipe out Silicon Valley and be wary of how much trust employees put in startup founders.
Instead of getting an AI startup entirely for the past two years, big tech companies have been licensing technology or trading for top talent, with startup employees sometimes splitting into different camps with what they have and no point in them. People with the most desirable AI skills will gain the wind while the rest of them are surrounded by uncertainty.
It happened recently to Windsurf employees after an AI coding company was about to be acquired by Openai for $3 billion, but instead split in half. Google paid billions of dollars to hire Windsurf CEOs and top talent, and the hundreds remaining employees were acquired by another startup, Acknowledge.
Unfortunately for startup employees, many investors do not want the speed of AI development to wait months or years for regulatory approval, so they expect these types of new transactions to continue.
Candidates should ask difficult questions about founders
Given that traditional M&As have mostly come out of the window, it's more important than ever for startup employees to do their homework, advises Steve Brotman, managing partner at Alpha Partners.
“It's important to understand the ownership dynamics in light of what we just saw on Windsurf,” Brotman said. “I don't want to work 100 hours just to realize that your options are underwater or that your exit is capped. And remember: companies that are transparent and cautious about governance tend to be a better long-term bet for both your career and your fairness.”
“We ask harsh questions about the runway, revenue, burns and the quality of investors' syndicates,” Blotman continued. “Who is on the board? Are they made up for long-term growth and quick flips?”
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According to Deedy Das, an investor at Menlo Ventures, the most important thing a candidate should rate is how much he trusts his founder.
“No one wants to talk about the fact that founders control almost everything that happens in a company, including how they pay, when they pay, how much they vest and how they can sell equity,” Das said. “That's everything, so it's very important to trust founders to have their teams do the right thing.”
Sign candidate and CEO Hari Raghavan said that the same way investors research founders before writing a check for one of many portfolio companies, future employees should ask about founders.
“They should be diligent about whether this is a stand-up guy,” Raghavan said. “Are these guys going to take care of me?”
Raghavan suggests that founders need to sign a written pledge agreeing to treat employees well in terms of stock options and exit scenarios.
“These are things that a great founder should do and the majority of good people should do, but I think it's a good idea to just establish that set of rules,” he said.
Future employees should not be afraid to “interrogate” the founders about how they think about the exit, according to Jake Saper, general partner at Emergence Capital.
“We ask the founders for a licensing agreement to remain independent, to remain a classic takeover or to carve out key people,” Saper said. “Their answers tell us a lot about the journey you signed up for.”
Scrutiny of fine printing has also become even more important, Saper said.
“If you only have 'virtually everything' of your team's movements, make sure you spell out accelerated letters and inventory contract offerings, dealing with options and holding bonuses,” Saper said. “These clauses are important to inflections and windsurfs and will once again become important.”
In 2024, Microsoft hired the founders of Inflection AI, Mustafa Suleyman, and the startup staff to lead the AI efforts.
In June, Meta paid $14 billion against 49% stake Data Labeling Company Scale AI and AI, and hired its founder Alexandr Wang to run the Superintelligence Group. Meta also hired some of the startup researchers. last week, Scale AI unlocks 14% It made it clear that of that workforce, or of the 200 employees, is unprofitable.
Finally, Saper says it will take a stern look at the underlying business model of a startup and make sure it continues.
“Startups with unique data feeds, embedded distributions, or clear repeat revenues have leverage to remain independent,” Saper says. “If a company's key assets are great but portable research teams, we need to assume Big Tech will knock.”
