Nicholas Domnisch is CEO/Partner at EE Solutions, an NYC-based consulting agency specializing in custom enterprise software & AI solutions.
For decades, startup success meant one of two things: ringing the bell at an IPO or announcing a headline-grabbing acquisition. Over time, the playbook expanded to include acqui-hires, direct listings and SPACs, but the promise remained the same—equity returns.
Now, a new outcome challenges the entire system: the phantom exit. This informal exit occurs when a large player hires away a startup’s founders and core team and licenses any desirable IP. The startup is left hollowed out, investors hold stranded equity and employees see their options devalued.
The Case For Phantom Exits
This playbook is most visible in Big Tech’s AI talent race, where expertise is scarcer than products. Unlike traditional exits, phantom exits bypass liquidity events, disclosures and antitrust reviews, quietly shifting talent and intellectual property into incumbents’ hands.
At an individual level, phantom exits can look rational and even attractive. Founders and engineers are not property. They should pursue higher pay, bigger platforms or the resources to scale their work. For startups burning cash on compute or other capital-intensive costs, integration into a larger company can accelerate progress.
From a market efficiency lens, this can look like smart reallocation: scarce talent moving to where it can be deployed at scale.
The Case Against Phantom Exits
Zooming out, the system-level damage is clearer. Phantom exits cut off the very outcomes (IPOs and acquisitions) that keep venture economics sustainable. They concentrate talent and IP into incumbents with less oversight, while eliminating competition.
Venture capital depends on a power-law distribution, where a few outliers fund the ecosystem. Phantom exits remove those outliers before they can deliver large-scale returns. The downside remains, but the upside vanishes. Over time, this erodes limited partners’ confidence and makes it harder for new entrepreneurs to raise capital.
They also sit in a regulatory blind spot. Because no formal merger occurs, phantom exits typically avoid antitrust thresholds. Individually, they seem small, but collectively they accelerate consolidation, especially in fast-moving fields like AI, without showing up in merger data.
Muted Investor Outcomes
In March 2024, Microsoft reportedly agreed to pay roughly $650 million for a nonexclusive license to Inflection AI’s models while hiring “most” of its ~70-person team, including cofounders Mustafa Suleyman and Karén Simonyan. Inflection had raised $1.3 billion at a $4 billion valuation. Investor returns were limited to below 1.50-times, far below typical venture capital exit multiples. According to Reuters, UC Berkeley professor Steven Weber noted, “This deal could be seen as an effort to reduce competition in the foundation model markets, as [Inflection] is going to be a shell of its former self.”
The U.K.’s Competition and Markets Authority reviewed the arrangement as a “relevant merger situation” but ultimately concluded it “does not give rise to a realistic prospect of a substantial lessening of competition” because Inflection had “a very small share” of chatbot usage in the U.K. and was not regarded as “a material competitive constraint.”
Additionally, in August 2024, Google hired Character.AI cofounders Noam Shazeer and Daniel De Freitas and signed a deal to license the startup’s language models. Reuters reports, “Character.AI previously raised $193 million in venture capital from investors including Andreessen Horowitz. It was in talks to raise hundreds [of] millions from Google.”
These are not isolated cases. In mid-2024, Amazon struck a deal with Adept, taking a nonexclusive license to its technology while hiring much of its team to accelerate Amazon’s internal AI initiatives. Founders secure opportunities and incumbents gain speed, but investors and remaining employees are often left behind.
Lessened Transparency And Regulatory Oversight
Traditional exits did more than pay out. They created accountability through audited disclosures, pricing signals and antitrust scrutiny. Phantom exits avoid all of that. No acquisition. No paperwork. No oversight.
In an article titled “Are Big Tech’s Quasi-Mergers With AI Startups Anticompetitive?“, Alexandros Kazimirov, a research fellow at the American Antitrust Institute, described these deals as “quasi-mergers” that resemble the Inflection playbook. Rather than a traditional takeover, incumbents gain both the talent and the technology through licensing while sidestepping the scrutiny of formal merger review. As Kazimirov explains, such arrangements “deflate the expectation of outsized returns for venture capital investors” and “split the startup’s employees into two groups, abandoning one in a lingering entity with an uncertain future.”
The Likely Path Forward
Regulators face a dilemma. Antitrust law is built to scrutinize mergers, not job offers. There is no statute against hiring smart people. But if regulators treat clusters of hires as acquisitions, they risk restricting worker mobility and slowing legitimate hiring across industries.
This paradox is what makes phantom exits so thorny:
• They empower individuals but undermine collective outcomes.
• They accelerate innovation inside incumbents but reduce ecosystem diversity.
• They avoid visibility, leaving regulators and investors blind to structural change.
For incumbents, the appeal is speed. Traditional acquisitions can take months and invite scrutiny. A phantom exit secures critical teams in weeks. That time advantage makes the playbook too valuable to abandon.
Therefore, a sweeping rule against phantom exits is unlikely. Instead, expect incremental adjustments:
• Regulatory Testing: Agencies will continue probing deals at the edge of their authority, as the CMA did with Microsoft and Inflection.
• Investor Tools: Funds may experiment with contingent value rights, licensing-linked payouts or stronger disclosure requirements tied to leadership departures.
• Ecosystem Adaptation: Entrepreneurs may need new financing structures and governance models that anticipate this risk.
The Phantom Exit Paradox
Ultimately, phantom exits highlight a structural paradox at the heart of entrepreneurship. The same deals that make sense for individuals (lucrative roles, faster scale) can destabilize the startup ecosystem when repeated at scale. If too many potential outliers vanish this way, the venture model itself becomes harder to sustain.
The real challenge is balance: protecting individual mobility without hollowing out the system that enabled those individuals to take risks in the first place. Phantom exits make that balance more fragile and force us to rethink what “startup success” really means.
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