This was just a preference cliff, plain+simple. Windsurf got paid maybe $3B for itself. But the investors and senior management got their cut first. How? Well, the preferences they negotiated.
No one really knows how the game is played
The art of the trade
How the sausage gets made
We just assume that it happens
But no one else is in the room where it happens
#2 wasn't in the room when it happened. In a very real sense, he's lucky he got anything. Management owes a fiduciary duty to the shareholders and #2 is a shareholder. But negotiating the $3B covers that duty.
Doesn't seem that simple. They raised a total of ~$250m and acquisition price was almost 10x that. The preference cliff means that employees get nothing before investors get an X% return on their investment (100%, 150%, maybe 200%). After that, the payout should be proportional to common stock ownership. Surely the preference guarantee was not 10x?
Would be curious to see the breakdown of the $2.4b:
1. How much to the founders in Google employment incentives
2. How much in licensing fee to the company itself
3. How of the licensing fee went to immediate payout to VC investors (+ employees)
4. How much got left on the balance sheet of the remaining company
I don't understand how #3 can be so large and common stock holders walk away with almost nothing without breaching fiduciary duty?
The August 2024 Series C round (last of 4 rounds) for $150M could dilute+smoke the preference stack for any earlier investors of which #2 nominally was basically the earliest class member of. C gets preferences+participation. B+A get preferences+participation+anti-dilution. Common gets what's left which apparently wasn't much.
Fiduciary duty is very low bar. Management has to act in the best interests of The Company, as in, as a whole. The company != #2. Lawyers are not taking this case.
I'm certain the accounting was done properly, maybe even by a Perl script, and this is how it penciled out. The question for us stiffs is what can we learn from it?
