What the Windsurf sale means for the AI coding ecosystem
ethanding.substack.com
ethanding.substack.com
- Cursor did not hire Anthropic's "researchers". It hired the guys who built Claude code (PM and dev). Who then promptly went back to Anthropic in 14 days. A researcher for Cursor need not come from Anthropic either. One high profile recruit for them was Jack Gallagher (Midjourney) who is probably one of the best at RL.
- Google's deal with Windsurf is structured that way because they likely could not directly acquire, or were not confident that it would have gotten past the antitrust. A signal for that is such deal increased in last few years after FTC refused to allow any deal over $100M or so. Microsoft has done such deals too. Meta would have acquired scale ai in older times. Not sure with Openai, but they arent as scrutinized as Google for such deals. To imply that this means Google did not care about ARR is not justified. and then google licensed Windsurf's IP too.
- Openai's agreements with Microsoft is more probable than they did not complete the acquisition because of negative gross margins.
- Plus, the old adage about how a growing startup is worth more because of a stellar team. You strip a team away and still get 2x multiple is sure enough valuing the current ARR highly.
I thought the userbase is valuable. A sale at this point made sense because they might not have been to get the money if they waited a year. Reasons laid out in the article are not why I think so.
I've been following OpenAI, Google, and Microsoft's acquisitions over the last five years, and the US government has given them the green light when it comes to AI. It makes sense since the FTC and DOJ directors are appointed by the government, and the government is concerned about China's advances in AI.
Also, Google pulled the same move Microsoft did with Inflection AI. They hired Windsurf's CEO, its co-founder, and other key people, and licensed Windsurfs codebase without acquiring the company. It was the smartest business move they could make.
So from a business and political point of view, your assumption doesn't hold up.
> Openai's agreements with Microsoft is more probable than they did not complete the acquisition because of negative gross margins.
This is also incorrect and the first time I've heard this reason. Executives have already told reporters that OpenAI and Microsoft have an agreement, and Microsoft doesn't want OpenAI entering the software development arena. They hold the keys to GitHub, and that's keeping everyone out for now, including Google.
> Plus, the old adage about how a growing startup is worth more because of a stellar team. You strip a team away and still get 2x multiple is sure enough valuing the current ARR highly.
I don't think so. Investors back people first, and in AI, the people are everything. Just look at how much Meta is willing to pay top AI researchers. OpenAI, Microsoft, and Google are all chasing the same talent. Knowledge is extremely valuable when it comes to AI/ML.
Google learned this the hard way when it let Noam Shazeer leave. When they realised how valuable he was, they ended up paying $2.7 billion to bring him back.
Re Microsoft and Windsurf, this[1] article claims Windsurf did not want MS accessing it's intellectual property, a default condition for Microsoft OpenAI deal.
> Windsurf didn’t want Microsoft to have access to its intellectual property — a condition that OpenAI was unsuccessful in getting Microsoft’s agreement on, people familiar said. That was one of several sticking points in Microsoft and OpenAI’s ongoing talks about the AI company’s effort to restructure into a commercial entity. Microsoft’s existing agreement with OpenAI says the software giant is entitled to access the startup’s technology.
This is different from Microsoft not wanting openai to compete with Github copilot, given thats what they do with Codex anyway.
> Knowledge is extremely valuable when it comes to AI/ML We agree on that, but even in the past most acquisitions would value teams at a certain cost too. Without the team that built it, any company would struggle to get a good multiple. OP's claim was that lower multiple was cos of margins only, and i disagreed there.
[1]: https://www.bloomberg.com/news/articles/2025-07-11/openai-s-...
By the way, The latest article before this one was "tokens are getting more expensive". (One week before $1.25/$10 GPT5 releases. Talking about aging like milk...)
There has never been more drama in tech. 007 level drama with chinese and russian spies.
Can we just relax and have fun.
Any proof of this? It's quite speculative. Also FTC scrutiny is not escaped if you only acquire a percentage of a company to avoid antitrust scrutiny (as you claim Meta did, speaking of which...)
> Meta would have acquired scale ai in older times
According to reporting, Meta was solely interested in Wang and his inner circle, and did not want to acquire a significant stake in the company. Wang negotiated them UP. It's not as if they wanted to buy the whole thing at its previous valuation, let alone a higher valuation. (source: https://archive.is/ZPoNJ)
https://www.bloomberg.com/opinion/articles/2025-07-17/meta-g...
https://natlawreview.com/article/rise-acquihiring-post-layof...
https://bowoftheseus.substack.com/p/update-the-gut-and-licen...
Meta's case is interesting. In the past, for what they want, I still feel they would have just acquired the company and be done with it. Now, they explored more paths, and ended up negotiating for Scale AI's stake.
> The data shows that after four years of being frozen out of the acquihire market by former FTC chair Lina Khan, big tech companies are back with a vengeance
That (and the accompanying chart showing total acquihires over years) says acquihires existed before regulatory scrutiny, stopped while that scrutiny ramped up, and came back when the scrutiny went away. Not what you suggested, that it's a novel tool used to avoid scrutiny.
I appreciate how you feel, but it's based on ultimately, just a feeling, not any statistics (the stats in your linked articles paint another picture entirely about acquihires). Also, there is the basic fact that FTC scrutiny cannot be avoided by minority ownership or acquihiring alone. They have the right and ability to investigate even minority purchases of stake in a company. This is a good case study of that: https://www.faegredrinker.com/en/insights/publications/2018/...
openai's $3b acquisition of windsurf falls apart. after months of negotiations, they walk away.
google announces they're paying $2.4b to hire windsurf's ceo and 41 researchers for deepmind. not to acquire windsurf. just the humans. the same day openai walks. what a coincidence!
My question is what happened to the $2.4B? Apparently very little of it made its way to the Windsurf employees, as #2 tweeted last week. It wasn't an acquisition although Cognition was. Cognition bought a company for $250M that just got a check for $2.4B. How exactly did this work?
Paying debitors and investors?
We don't know what deal they made with the VCs, but they could have multiple liquidation preference agreements.
> A liquidation preference multiple (e.g., 1x, 2x) determines how much investors receive before any distribution to common shareholders. A 2x preference means investors are entitled to twice their initial investment amount before others receive payouts.
Then Cognition offers $250M for Windsurf itself. Ok, I can imagine the preference cliffs kicking in now. But Windsurf just got a check for $2.4B and I don't think they had anywhere close to that in liabilities.
So where'd the $2.4B go? This seems like a strange deal.
But Windsurf could distribute profit at this point before the Cognition deal. I guess this is where the preference rights got exercised. The tweet from employee #2 said his stock wasn't worth anything. Actually, he got preferenced out of the $1.2B in dividends.
Then came the $250M Cognition deal. He got preferenced out of the proceeds of the Cognition deal as well.
Employees who haven't vested their shares can't complain/enforce tag-along/sue for minority investor rights.
Exactly! That definitely means that the $82M ARR business and the tech behind it is definitely valuable to Google
_Huge_ payday if true.
Isn't this an admission that you cannot get rich by getting a job at a hot private early-stage startup? Even if you're the employee #2?
That you'd be far more likely to get rich by getting a job at Google / Meta / Amazon, getting rich through RSU time-of-award to time-of-disposition growth, then doing private investing in a company like Windsurf, then getting even richer as an investor, all actual employees creating value be damned?
It’s going to be much more difficult to get employees for early stage startups from here on out.
https://news.ycombinator.com/item?id=10758278 (2015 danluu.com/startup-tradeoffs)
This Windsurf employee #2 revelation of the 99% loss in value for employee stock, is simply a confirmation of an existing practice, just more visible and easier to reason about.
The big players (Google, Microsoft, Meta, Nvidia) don't want ai startups failing. In fact they are terrified of that. Can you imagine the market shock if windsurf just went under in 1 year. How fearful all investors would be? How the whole market is gonna react? We are told that AI is basically a money printer. If you release a product for $20/month and a couple of months later other companies (with much better margins by definition) release competitor for $250 then $300 then $400 something is clearly not adding up even among the higher numbers.
They might not have enough money to bail eachother.
Mostly when you read about a big company buying a small startup, it's actually an investor bail out. The company has technically failed and the investors basically want to get rid of the failing company in a way that doesn't make them look like muppets. So there's a nice press release, an undisclosed share swap, and tada another successful exit .. of a company and technology that you will never hear from again. This is nothing new. This is what happens to most startups that don't IPO.
Codium was alright a few years ago but by now it's a commodity. Amazing idea of having a little side bar in VS code with a bare bones chat UI that you could hookup to your openAI API key. They build bits and pieces of tech with some merit to it since then of course. But nothing that cannot and is not being replicated by others. Same with Cursor, windsurf and all the other niche players in this market. None of these companies has much of a moat.
And at this point all the big companies have their in house built solutions: Claude Code, Google has Julius, OpenAI has codex, MS has co-pilot, AWS recently launched their own thing. Clearly building these things is not that hard. All the IP is in the models and infrastructure.
But the M7 are doing some actual work. DeepMind is doing some projects that are changing the world for 10 years. Like their research in protein folding, general chemistry physics, biology, medicine.
In such a case, I think we will see a move to smaller, domain specific models. I think if the first cycle of the AI age is large, general models, the second will be smaller, domain specific ones that we can run on retail machines.
I guess replacing some bytes of text with 30KB of PNG is what happens when the platform you've chosen to use doesn't support the formatting you actually want.
If the answer is no for the whole ecosystem, it’s going to be much harder to see acquisition of companies like this.
Hmmm... I'm just saying things that are loosely related
That may be true (although I doubt the numbers add up). But what is keeping those researchers from walking away, or underperform whenever they feel like it? Giving them a lot of money surely isn't going to motivate them to work harder.
It's probably giving them access to one of the world's largest clusters of compute that lures them in.
isnt that the reason we give ceos lots of money?
They are given stock awards to encourage them to improve the value of the business.
How hard they work is irrelevant.
It makes sense that the answer is no.
launching multiple claudes in gitworktrees is not that hard. i have like 25 line bash function that does all that stuff in your project without nasty electron stuff.