When an employee joins a startup, there’s a social contract of sorts.
The employee takes a risk, joining a new company, in many cases one that doesn’t have proven revenue or a secure future. They join for the mission, the chance to take a seat on a possible rocket ship, and to work with a founder or set of cofounders they believe are exceptional. And of course, they join for the upside—the belief that the equity in a company that they take on as part of their compensation will actually be worth something in the end, that the founders they’ve risked their careers for will advocate for as many of their people as possible in the event of an exit.
“If that social compact fails, the whole system fails,” said Daniel Dart, founder of Rock Yard Ventures.
And this social contract has been under pressure in recent days and weeks, as multi-billion dollar acquihires take CEOs and cofounders away from the companies they’ve founded—leaving behind companies with uncertain futures and in many cases hundreds of employees or more. We’ve seen two notable cases in quick succession: Meta’s $14 billion deal for 49% of Scale AI, which moved
Scale CEO and cofounder Alex Wang to Meta, and Google’s $2.4 billion acquihire of Windsurf, a deal that left many employees behind—who then soon would see the remains of their company acquired by Cognition.
People are mad about Scale, sure—the company laid off about 200 staff members this week—but people are really incensed about Windsurf, a deal that excluded about 250 employees, fostering concerns not only about equity (in all senses of the word) but for what this means about the relationship between founders and their employees.
“I think the cascading net effect of this sort of situation is that it’s actually going to change what those early conversations with employees are like at startups,” said Dart.
To Amplitude CEO and cofounder Spenser Skates—who’s conducted both
acquihires and
acquisitions really recently—the Windsurf deal stands out as egregious. He likens it to a captain abandoning ship, comparing the situation to Francesco Schettino, who in 2012 fled the capsized Costa Concordia, leaving behind passengers and crew. Thirty-two people died in the disaster. Incidents like Windsurf, Skates says, show why it’s more important than ever for employees to think hard about the founder they’re throwing their lot in with.
“I think employees should ask the CEO and founders straight up: Are you going to leave? It’s crazy you have to do that,” said Skates. “But I think the character and integrity of the founders matters way more than ever.”
I asked Henry Shi, Super.com cofounder, if startup employees will start thinking differently about their hiring terms as deals like this happen more frequently.
“Yes, but unfortunately I’m not sure if they have many options or leverage,” Shi wrote via email. “Especially given the market dynamic between labor and capital as we approach economic AGI, early employees may not have that much leverage—except by starting their own companies.”
Because equity is what a founder makes it.
We’ll see more of this as the M&A marketplace continues at “AI speed,” said David Shim, CEO and cofounder of Read.ai via email. And we have, in fact, seen deals of this ilk before, from Microsoft’s acquihire of Inflection to Amazon’s of Adept. And, in the end, the fact that social media was so abuzz may actually be a good thing for startup employees. It means people still want the innovation economy to benefit all its participants.
Given that antitrust regulators don’t seem poised to police these kinds of deals anytime soon, the public reaction may indeed be one of the few guardrails.
“What we saw with the Windsurf deal was the ecosystem getting up in arms about the fairness for employees, which should create some sense of comfort,” said Yohei Nakajima, general partner at Untapped Capital. “While breaking up companies isn’t necessarily bad, it’s important that everybody gets their fair share—and especially if these types of deals continue, I’d hope to see more standards around how these get treated.”
See you Monday,
Allie Garfinkle
X: @agarfinksEmail: alexandra.garfinkle@fortune.comSubmit a deal for the Term Sheet newsletter
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