Daily Grind July 14, 2025: Google Poaches Windsurf Leaders, What It Means for the Startup Ecosystem
Welcome to Tech's morning newsletter, featuring one headline, one page of a great book, and one question to ponder
Good morning and happy Monday!
Sorry for the late newsletter today. It took me a lot of time to wrap my head around today’s headline.
Let’s get right into it:
📰 One Startup Headline: Windsurf CEO, Co-Founder, and Top Researchers Poached by Google
Windsurf, the world’s second most popular AI code editor, was recently set to be acquired by OpenAI for $3 billion.
Over the weekend, that deal fell through, and instead Windsurf leadership and key talent was poached by Google to join the Deep Mind team.
Google will reportedly pay $2.4 billion for the Windsurf talent and to license Windsurf’s technology. Key people in the deal include Windsurf’s CEO Varun Mohan, co-founder Douglas Chen, and some of the startup’s top researchers.
Read More: Windsurf’s CEO goes to Google; OpenAI’s acquisition falls apart [TechCrunch]
Windsurf Head of Business, Jeff Wang, will step up as Interim CEO. The startup will shift its focus from the consumer business to enterprise coding solutions.
The implications of this deal reach far beyond Google, and even the AI industry. It’s another step in a damaging new precedent that threatens to break the very fabric of startup innovation.
First, what happened to the OpenAI deal?
When news broke in April about OpenAI acquiring Windsurf for $3 billion, it was lauded as a visionary move.
HBS Professor and VC Jeff Bussgang shared on LinkedIn the three reasons why the deal made sense for both parties:
1. Workflow of Choice -- Becoming the "last mile" tool for a certain end user is still a wildly valuable competitive moat. Windsurf is well-established as the 2nd most popular coding assistant, making it a daily driver for thousands and thousands of customers (including many enterprises). From the reviews I hear in the field, they've nailed the last mile.
2. Human-AI Interface -- Does a tool have a unique insight into how humans and AI should interact? I would not say Windsurf's interface is "unique," but it has nailed some key elements of the human-AI interface. For example, it is lightning fast, nails auto-complete, and understands large contexts. The breadth of language support and plugins makes it easy to see an "immediate and obvious" benefit (important criteria for any product).
3. Proprietary Data -- Does the tool generate data and insights that are not available to the public LLMs? Windsurf has achieved a tremendous advantage here. Their models are being trained every day on proprietary code bases that their users are running through the model across a wide range of languages and platforms. That training scale is hard to replicate.
In the end, it was point #3 third that killed the deal.
According to the Wall Street Journal, OpenAI did not want to share Windsurf’s proprietary data with Microsoft, which is OpenAI’s largest backer. Microsoft already has access to all of OpenAI’s intellectual property, but OpenAI drew a line with it’s new acquisition.
Tensions between Microsoft and OpenAI reached a boiling point and in the end, the Windsurf deal was never approved.
Google Swoops In, AI Talent Wars Get Even Hotter
Within hours of the OpenAI-Windsurf deal falling through, Google struck its own deal with Windsurf leadership and key investors.
It’s the latest move in a super-heated competition for the top AI talent, where OpenAI has been on the losing end more often than not. Meta recently poached three of OpenAI’s top researchers and is also going after Apple talent.
This is not the first “acqui-hire” deal for Google, either. In August 2024, Google hired back Noam Shazeer for a reported $2.7 billion. In 2021, Shazeer left Google to build the chatbot startup Character.ai. The deal included a license for Character.ai technology, similar to the Windsurf deal. Character.ai has since struggled to stay relevant.
Microsoft has also been a major player in the talent wars. Along with being the largest investor in OpenAI, Microsoft hired Deep Mind co-founder Mustafa Suleyman from his AI startup, Inflection, in March 2024. Microsoft reportedly paid $650 million to acquire Inflection’s talent and legal use of its technology.
Like Windsurf, Inflection shifted its focus from consumer to enterprise solutions after Suleyman defected.
Why are these acqui-hire deals happening?
It’s mainly a workaround for big tech to skirt anti-competition laws.
Google and Microsoft would face legal challenges to buying these AI startups outright, so they are poaching top talent and licensing the technology instead. Big tech gets 99% of the value, without the headache (althrough these acqui-hires are also starting to face legal scrutiny).
The real losers in these deals are the startup employees.
What does this mean for the startup ecosystem?
When Windsurf and OpenAI announced the acquisition, Windsurf employees were celebrating. The startup, founded in just 2021, used generous employee equity compensation packages to attract the best and brightest talent.
Now, hundreds of rank-and-file startup employees will not be getting a pay day, and the startup’s most valuable assets—its leaders and its technology—are in the hands of a behemoth competing directly against them.
This deal and others like it (Character.ai and Inflection specifically) set a damaging new precedent for the startup ecosystem.
Startups rely heavily on the employee equity compensation model. It’s a social (and legal) pact that convinces talented people to earn less upfront for a chance at a major pay day down the road. Every new technology IPO mints hundreds, sometimes thousands of millionaires, who in turn seed the next generation of technology startups.
It is not hyperbole to say that we would not have a VC-backed technology industry without employee equity compensation. Now that we see how that pact can be broken, what incentive do people have to join startups?
As John Luttig said on his blog, “The AI talent wars will rewire Silicon Valley.”
We will need new business model innovations to counteract the damage being done with these acqui-hire deals. Will startup founders start to guarantee equity in the event that they are poached?
Time will tell.
🔗 A Few Good Links
Newcomer: AI Data Center Mania Conjures the B-Word. Is It Something to Fear?
Techcrunch: Study warns of ‘significant risks’ in using AI therapy chatbots
Twitter: An un-marked van dropped off a package at the home of Coinbase CEO Brian Armstrong. Apparently it was just a bottle of $1200 celebrity tequila. Is this a bit from Sillicon Valley?
📚 One Page: The Power Law by Sebastian Mallaby
In hindsight, choosing to read The Power Law last month was prescient. The history of venture capitalism and Sillicon Valley is the perfect backdrop for today’s news about Windsurf.
Arthur Rock, the founder of the very first true VC firm, discovered, almost by accident, the power of employee equity compensation. It was the tool that kickstarted Fairchild Semiconductor, then Intel, and virtually every startup success story since.
Unlike the SBICs, Davis & Rock raised money purely in the form of equity, not debt. The equity providers—that is, the outside limited partners—knew not to expect dividends, so Davis and Rock were free to invest in ambitious startups that used every dollar of capital to expand their business.²¹
As general partners, Davis and Rock were personally incentivized to prioritize expansion: they took their compensation in the form of a 20 percent share of the fund’s capital appreciation. Meanwhile, Rock was at pains to extend this equity mentality to the employees of his portfolio companies.
Having witnessed the effect of employee share ownership on the early culture of Fairchild, he believed in awarding managers, scientists, and salesmen with stock and stock options. In sum, everybody in the Davis & Rock orbit—the limited partners, the general partners, the entrepreneurs, their key employees—was compensated in the form of equity.
It was a world away from ARD, where the investment professionals had almost no financial interest in the expansion of their portfolio companies.
One must wonder what will happen to the startup ecosystem—and all it’s world-changing innovation—if founders continue to reneg on their promises to early employees.
❓ One Question: After Action Review
Every Monday I conduct a review of my previous week. I ask myself five questions:
What were my goals last week?
What did I accomplish? (be objective)
What did I feel went well last week?
What didn’t go well?
How can I improve for this week?
This simple review helps me build momentum from one week to the next. It also feels good to acknowledge the progress I’ve made.
It’s too easy to ignore the good and focus on the bad or what’s still left to be done. Take some time today to focus on the positives as well!
🗳️ Wrap Up and Feedback:
That’s it for today. Your feedback has been ENORMOUSLY helpful as I try to home in on this new newsletter format.
In addition to the poll above, reply and let me know:
What are your thoughts on the Windsurf acqui-hire?
And if you liked today’s post, consider a re-post:
See you tomorrow!
Cheers,
Ben