Saying No to $3 Billion

Hey y’all — this week we’re diving into two things:

1. Why a16z no longer recommends founders incorporate in Delaware

2. Windsurf’s shocking about face: ditching a $3B acquisition from OpenAI and (allegedly) screwing over employees

But first, are you hiring?

A friend I’d highly recommend (we’ve worked together directly) is looking for a new role.

The #1 thing I’d highlight about them is that they can handle just about anything outside of product roles that you throw their way — ops, sales, CX, chief of staff, research, you name it.

Super organized, high-output, force-multiplier type — a perfect early stage hire.

Reply and tell me what you’re hiring for, and I’ll connect you.

Is Delaware Dead?

When you incorporate your startup, you do it as a Delaware C Corp.

You just do.

It’s become such a standard practice for a few reasons but primarily because of two things:

1. Investors are very familiar with the structure at this point, leading to simple deal structures

2. Delaware has a special business court called the Chancery Court which means rulings if disputes come up down the road will be predictable and with precedence

Those are the types of compounding, network-effect-driven advantages that any startup itself would love to have in their own market.

But it may be time for founders to start considering other options (i.e. states).

a16z announced this week that they are moving their incorporation to Nevada, and recommend founders consider doing the same — framing it as a more stable environment.

I had Grok summarize the points they made about why they’re moving, but the TLDR is that they flagged concerns around protections for company directors and against “frivolous” lawsuits.

My take: it’s a fair critique of Delaware’s dominance and follows, notably, Elon kicking off the process of moving Tesla’s state of incorporation to Texas.

The debacle last year that is likely the “frivolous” lawsuit a16z was referring to, where the Chancery Court stuck its fingers into how Tesla compensated Elon (despite it being approved by company shareholders), was a concerning moment of overreaching.

And now Delaware is trying to pull up the drawbridge to prevent people from leaving, having recently passed comical legislation specifically designed to keep other big companies from being able to easily move too.

The one place a founder wouldn’t want to incorporate a business is one that attempts to restrict their ability to do what’s best for that business — it’s basically the one way to defeat your own network effects, if you’re Delaware.

When I wrote about The New VC Model earlier this year, I noted that a16z tends to pioneer a lot of structural changes that other firms (and, when relevant, founders) tend to adopt later.

This seems likely to be another one of those cases, especially with Nevada and other states expanding business-centric courts like the Chancery Court.

Windsurf Says No to OpenAI’s $3 Billion

When talented people believe in your startup’s mission enough to take a risk and join early, you have a responsibility to take care of them as the company grows.

There’s a huge opportunity cost for these folks — they could go get free catered meals and make 2x (or more) in big tech, but instead they’ve decided they want to build your vision.

And the best way to take care of them is to be able to offer massive liquidity to them at some point down the road.

So when OpenAI announced in May that it was set to acquire Windsurf (an AI-first IDE, like Cursor) for $3 billion, presumably everyone at Windsurf was thrilled.

However, in a truly stunning switchup, the deal is now off and some Windsurf execs are going to Google to work on DeepMind.

Google will “license” Windsurf but is not acquiring it and will make no direct investment into the company.

This means anyone not being hired by Google as part of the deal gets (allegedly) nothing at all and, without the top execs, what remains of Windsurf will effectively be a shell of its former self.

Details on this are still coming out and there’s a lot of contradictory posts out there on it, but here’s a good summary:

For Windsurf’s founders and investors, it’s hard to paint a good picture here. This is just a bad look.

They allegedly let the OpenAI deal fall apart due to concerns about giving data access to Microsoft as part of the arrangement, though it doesn’t seem like that was the only issue.

Even if the left-behind employees now own 100% of the original company (which is allegedly the case), there’s almost no chance they’d be able to secure another $3B deal without the founders and key execs, and raising more venture will be next-to-impossible without them too.

They basically need to run the company as a cashflowing business in order for it to be sustainable but, if they do that, more employees (who want the high-upside equity opportunity of an early stage startup) will go elsewhere fast.

I hope Windsurf’s insiders step up and offer something to the employees who aren’t going over to Google.

Don’t do this to your employees.

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