Microsoft’s Inflection AI grab likely cost more than $1 billion, says an insider (exclusive)

When Microsoft announced last week that it had hired two of the three founders of Inflection AI, as well as most of the startup’s employees, little was known about the deal except that it also contained guarantees for the startup’s investors, and that the tech giant also bought the rights to sell access to Inflection’s most powerful model. Now more details are starting to come to light.

Microsoft paid Inflection AI $620 million for the nonexclusive right to sell access to the Inflection AI model through its Azure Cloud over a multiyear period, the companies confirm. Microsoft paid an additional $33 million for a waver from claims against it related to hiring Inflection employees. But, according to an internal document shared with Fast Company, that was only one aspect of the agreement.

Part of that $653 million total may go toward buying back the equity of existing Inflection shareholders, who have been guaranteed $1.50 for every dollar of equity they own. Inflection anticipates paying out $380 million for that purpose, according to the document. 

Neither company would divulge the value of the compensation package that Microsoft granted to Mustafa Suleyman, Inflection’s founder and former CEO, who now leads Microsoft’s consumer AI division. Suleyman’s compensation package was based on the market rate of someone of his pedigree, on the amount of equity he owns in Inflection, and on his future performance and the performance of his AI division at Microsoft, says a Microsoft source with knowledge of the agreement. Suleyman will be paid in salary, performance bonuses, and Microsoft stock that will vest over a 10-year period. (Both Microsoft and Inflection declined to comment on record.)

After the model licensing fee, the waiver fee, and the executive and employee compensation is tallied, Microsoft’s deal with Inflection is likely worth more than $1 billion, says a source with direct knowledge of the deal, who spoke on condition of anonymity because the terms of the deal have not been made public.

Inflection investors didn’t make out quite so well. Those who came in on the first Inflection funding round were promised an upside return of $1.50 on every dollar they’d invested in Inflection, says the source with knowledge of the deal. Inflection AI will now operate as a B2B licensor of the Inflection AI model. Investors who came in on the second investment round last June were guaranteed an upside return of $1.10 on every dollar invested, the source said. But the new B2B version of Inflection has far less upside than the original Inflection, which had been valued at $4 billion.

Neither Microsoft nor Inflection would detail the compensation (or the number) of Inflection employees who transferred to Microsoft, nor the value of the compensation package granted to Inflection cofounder Karén Simonyan, who will help Suleyman run the consumer AI division.

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