Inside The $250 Million Subnautica 2 Battle

Hello, One Take Dryer here. Uh you might have seen the news today on Bloomberg News, a website about video games, that Krafton, the Korean publisher, has been forced to pay bonuses to the developers of Subnautica 2, and the CEO of the company behind Subnautica 2 has stepped down, which is the end of a year-long legal dramatic saga over a $250 million dollar bonus payment. Today, I wanted to talk a little bit about that and tell the story, cuz it's something that I have been reporting on and following and breaking news about for the past year, since it all started. So, here's the story of Subnautica 2 and a $250 million dollar bonus that Krafton did not want to pay. It all starts in May of 2001, when a company called Unknown Worlds Entertainment is founded by two guys, Charlie Cleveland and Max McGuire. They wind up making this Half-Life mod called

Natural Selection. It's pretty successful. They make a sequel to it. It's really successful. In 2014, they release this game called Subnautica in early access. That is this underwater survival game, um inspired by Minecraft, inspired by a lot of things. It's really cool, finds a lot of success, people really like it. Um they wind up getting a stake from this Chinese company called Perfect World that they the Perfect World winds up later selling it back to its founders, but they wind up finding a lot of success, getting a lot of money for this game. Um by the time they have gotten uh out this expansion, the standalone expansion called Below Zero, the combined two games, Subnautica and Below Zero, wind up selling total of more than 17 million copies. So, very, very successful video game. And when they announce they're doing a sequel, it becomes the most solicited game on Steam. People are pretty jazzed about it. Um so, Charlie Cleveland and Max McGuire are our two founders. They wind up bringing on this guy named Ted Gill into 2018 to become president of the

company and essentially help those two creative guys turn it into a proper business. And a few years after that, as Subnautica 2 is underway, um they wind up getting purchased by Krafton, the Korean publisher that is best known for as the publisher of PUBG, PlayerUnknown's Battlegrounds, but has also made a few other things over the years. And so Krafton buys them for um this number is a little bit preposterous, but $500 in just a base price, plus a $250 million incentive bonus, a payout that is tied to hitting certain financial targets. So, a total of potentially $750 for Unknown Worlds Entertainment, which I mean, man, that's that's more than Sony paid for Insomniac, just to put things in perspective here. Um but this was a time, of course, I've talked about this time uh talked about this before. It's a time of zero interest rates, of ZIRP, of um Bungie getting purchased for more

than $3 billion, Activision getting purchased for $69 billion. So, this is a time when people are just throwing around money just like crazy. Um but this this this amount for this particular studio, a studio with with uh a couple of hits that is pretty small scale, is is pretty noteworthy. Um as part of this deal, uh the three executives, Cleveland, McGuire, and Gill, retain operational control, which means they decide how to run things, they decide when to release games, what games to make. They get operational control. They do have to keep Krafton in the loop, but they are running the studio. Um so, what happens over the next couple of years is that Cleveland and McGuire wind up bringing on this game called Moonbreaker, while some other people in the studio work on a sequel to Subnautica. Um and uh Moonbreaker fails. Moonbreaker does not do well. And uh Cleveland and McGuire, for various reasons, both wind up getting a little bit burnt out, not wanting to do just kind of day-to-day work on Subnautica anymore. Cleveland winds up taking a leave and then refocusing on film stuff. Um, Maguire

does some technical stuff and also winds up kind of pivoting a little bit. Um, at the same time Subnautica 2 has some development issues of its own, winds up with a leadership change. A guy named Anthony Gallagos, who uh, people might know because he used to be part of the Game Spot. Uh, he winds up taking over. Uh, I believe he still does podcast as well. Um, and in 2024, like a few months after the release of Moonbreaker, maybe like a year after the release of Moonbreaker, Cleveland and Maguire wind up taking reduced roles. Um, here is where we get into one of the first points of disputation between Krafton and Unknown Worlds, which is that um, according to uh, the Cleveland and Maguire, they made it very clear to Krafton that they were taking reduced roles, that Cleveland was going to start focusing on a Subnautica movie as well as other projects, um, like an AI Christmas film that he made. Um, and according to Cleveland and Maguire, Krafton is okay with this because it's helping lead to a Subnautica film and that's good news for everybody. Whereas Krafton would later dispute how much they knew about this and how how in the loop they were about whether Cleveland

and Maguire, the co-founders, were actually still involved with the studio and with Subnautica. But cut to 2025, Subnautica 2 is back on track after some initial issues and everybody at the studio sees it as on track for an August 2025 early access release. Um, people at the studio are happy with this. Um, I've talked to developers at the studio about like whether they felt like the game was ready. Um, pretty much everyone I talked to said yes. I've talked to people outside the studio who play tested it, who said like they felt like it was ready. And the reason I say this is because this comes into dispute later. But at this point, like I said before, Subnautica 2 on track to be a big hit. It is the most wish listed game on Steam. Um, several million people have wish listed it. Um, and in May of 2025, ahead of the release, there is this big review meeting. They go over the milestone, they go over the financial projections, and this is where the CEO of Krafton starts to get a little nervous because the that $250 million bonus payout is basically going to be

determined by Unknown Worlds, the developer, hitting certain revenue targets by targets by the end of 2025. It gets a little little messy, the details are a little granular. I won't get into all the specific details, but essentially if Subnautica, Unknown Worlds Entertainment, the developer of Subnautica, if they hit certain revenue targets by either the end of 2025 or like early 2026, they will hit their bonus, and that $250 million will be paid out to the studio. Largely to the three executives, but also a big chunk of it will go to the developers and the employees of the studio as well. So, CH Kim, CEO of Krafton, looks at the projections for Subnautica 2, sees how much that Krafton and and UWE are expecting it to sell, and gets a little nervous. And according to a court ruling by a judge later, we'll get into the litigation of it all in a little bit, but according to a court ruling, so this is according to a judge, Kim at this point turns to ChatGPT. And he says, "Hey, ChatGPT, give me a

strategy for getting out of this contract." And ChatGPT says, "Well, it'll be a little hard, but here's the strategy." And I'm going to read to you a quote from the ChatGPT the chat that the CEO of Krafton had. This is part of the the overall strategy, which is quote, "Preemptive framing. Repeat that protecting quality and fan trust is the highest priority. Undermine the quote large corporation versus indie and quote framing." Which is what he does. And so, over the next few weeks, there's this weird kind of media blitz. And on June 12th, Krafton winds up taking over the Subnautica website and putting this message up there that is unbeknownst to the people who are actually working on the game. And they essentially say they have Cleveland and Maguire to take over Subnautica 2 and that those two are considering it, which is not true. Um per ChatGPT advice, Krafton also winds up taking over the Steam publishing rights for the game and locking Unknown Worlds Entertainment out of like Steam control. Um so throughout June, as things are starting to deteriorate, as

things are starting to get very messy over this game, the executives at UWE start negotiating with Krafton and it starts becoming this long conversation. Can we get a settlement? Um can we agree maybe to a lower bonus payout? Like what is that going to look like? They start exploring all these different possibilities, but soon it becomes clear that none of that is going to happen. And on July 1st, 2025, last year, Krafton fires Gill, Cleveland, and Maguire. So the CEO Gill and the two co-founders Cleveland and Maguire. And Krafton at the same time says we're not shipping in August, the game is delayed. People within the studio, within UWE, say, "Well, what does that mean for our bonus payouts?" And they do not get a straight answer because of the this point. Uh Kim has, as he asked ChatGPT, is trying to get out of that. Um later, a little bit later, uh it winds up coming down from Krafton. They're like, "Oh, actually we're going to delay it. We might still give you bonuses, but it's not made 100% clear." To replace Gill, they appoint a guy named Steve Papoutsis, who is already uh the CEO of a different Krafton studio and hasn't actually played any UWE games. So he's

kind of like it's it's a weird thing. Very difficult to be the CEO of two studios at the same time. Um fun fact, Steve Papoutsis, uh now video long-time video game executive, he was a a studio head of Visceral Games at EA for a little bit. Um he was, I believe, let me double-check to make sure I have this right, but he was a musician in a former life and he actually played for um a a relatively well-known uh punk band called No Use for a Name. He was the bassist. So fun little fact about Steve Papoutsis. Anyway, uh around this time is when I start breaking news to Bloomberg and I'll throw some links in the show notes about what's going on and how these guys these three executives were fired over this bonus dispute and the three executives wind up filing legal action for breach of contract and then it winds up going into this big court case in Delaware. So at this point Crafton is actually saying you guys were terminated for trying to prematurely release Subnautica 2. The game wasn't

ready. You guys were trying to prematurely release it to hit your bonus and we think that's wrong. So we are firing you and delaying the game. But actually in court as the the case goes to court later that year, Crafton kind of does away with that argument, takes that argument back. And Crafton argues, makes two arguments about why they were actually terminated. Cuz remember, these guys these three executives are saying they were wrongfully terminated and so Crafton is trying to justify why they were terminated. So Crafton makes two arguments. One is that they were terminated for neglecting their duties, which gets back to the dispute I mentioned earlier about Cleveland and McGuire no longer being on Subnautica. And Cleveland being movie stuff and part of Crafton's again media blitz and what they're saying publicly is that like, hey these guys were were should have been working on Subnautica and they weren't. They off to make AI Christmas movies, etc. But the judge finds in her ruling that is issued later that actually they were transparent about their new roles. So despite the dispute there, the judge's ruling is that Cleveland and McGuire were pretty clear about what they were doing and how they were not involved in

Subnautica anymore. Um Crafton also accuses the executives of stealing data from the company because in during this June negotiation period where things got really messy and they were talking about settlements and it wasn't clear what was going to happen, the three executives wind up downloading all this source code to their personal devices and other files from the company just gigabytes and gigabytes of information from Crafton. They wind up downloading it onto their personal devices. And the judge also doesn't buy this argument for a few reasons. First and foremost, because during this court case, during this this trial, um a Krafton executive actually testifies that they didn't learn about the data downloads until uh July after the executives had already been fired. So it was So for then Krafton to turn around and say, "Hey, we fired them because they were stealing all this data." doesn't really hold up to the scrutiny of the timeline. So, okay. So, this this is going on throughout the fall of last year, and the ruling comes down in March of this year. And I'm going to read from

the judge's ruling because it's pretty scathing. Um the judge writes, quote, "Krafton's true focus in June 2025 was avoiding its financial exposure. In New Subnautica 2 was poised to achieve a $250 million earnout, which Kim, CEO of Krafton, viewed as a catastrophic failure. Krafton undertook Project X." Um that's the name of the kind of the code name that they had for this this uh attempt to to get out of the deal. "Krafton undertook Project X to either force a deal on the earnout or execute a quote takeover of the studio. Terminating Terminating the founders was one tactic explored and ultimately chosen by Krafton to accomplish its goals." Um and here's another quote from the judge. "When an employer faces a contractual payout it wishes to avoid, it is heavily incentivized to go rummaging through the employee's history to find any reason it can to announce that the termination was really for cause. That is precisely what happened here. Frustrated by the key employees

the three executives refusal to forfeit operational control and facing a nine-figure liability, Krafton went searching for a pretext." So, essentially the judge is saying Krafton wanted to get out of paying the bonus and therefore fired the executives and delayed the game. So, the judge says, "Hey, we are ruling in the execs' favor." Reinstating Ted Gill. This is where things get really crazy because Ted Gill, CEO of the company, was fired in the summer of 2025 and the judge reinstated him in March of 2026, which means that suddenly Ted Gill was going back to work for Krafton, and the executives who had fired him just a few months earlier. According to this judge's ruling, they say Gill must get back operating control, including the Steam and the rights to publish the game, and the judge pushes back the earnout period. So, essentially says that like now they have a lot more time to get this bonus. Um and the judge also says that this is just the first step of the first phase of this ruling, and a little bit later they're going to determine monetary damages because the three execs could still get money from Krafton on top of everything else, on top of the bonus, on

top of everything else. The judge could rule against Krafton that Krafton has to pay for damages as part of this litigation. Man, wild so far, right? So, here we are. So, it's March of 2026. Um right after this ruling is filed, Steve Papoutsis, the new CEO of Unknown Worlds Entertainment, at least until Gill is reinstated, he writes a letter, and this letter is leaked to IGN, and it says they're on track to release Subnautica 2 in early access in May. And the executives, Gill and Cleveland and McGuire, see this is like one final FU mode before the reinstatement, and they say, "Hey, Krafton, like uh they basically accuse Krafton of both like putting that letter out to lock Gill into this date just as he's like getting reinstated, and also leaking the letter." Um they wind up eventually just kind of moving on past that and and dropping those few charges about that, and they actually wind up releasing the game in May 2026. Gill winds up taking back over at the studio. Game comes out. It's a massive hit. Sells more than 4 million copies. Breaks like all sorts of crazy Steam charts. Um had like

350,000 concurrents on Steam at one point. Um people love it. Uh I think helps kind of uh it's evidence essentially that it it was more than ready for early access and probably would have been ready for early access in August, too. Um and uh Kotaku today, a few weeks after that, um I spoke to Ted Gill uh this morning, July 1st, and he told me that yesterday was his last day at Unknown Worlds Entertainment. He has stepped down from the studio by kind of mutual decision with Krafton. They're going to find a new CEO from both outside Krafton and Unknown Worlds Entertainment. So, it won't be Sifu Poots again. They're going to look for someone. Um they've settled all pending litigation with Krafton, so that second phase I mentioned earlier with the monetary damages, that is no longer going to go through. That has been settled. Um Ted Gill would not talk about specific terms of the settlement. Um I think some might wind up coming out when when things are unsealed a little bit later, but he would not wind up he would not talk about that stuff. Um but he did tell me that as part of this whole settlement and as part of this

whole arrangement, all of the employees at Unknown Worlds Entertainment will get bonuses um more than expected, significantly more than they were expected. And even employees who weren't on the list to get bonuses will still also get bonuses. So, back in 2021 when this is all put together, that $250 million bonus, um I believe it was a 90/10% split. So, 90% of it would go to those three executives. Nice nice chunk of change there. Whereas the remaining 10%, $25 million would be divvied up among uh the 40 or 50 employees who were at Unknown Worlds at the time. But of course, in the 5 years since then, Unknown Worlds has hired a lot of people to work on Subnautica 2 who were not on that list to receive earn outs. But as a result of this new settlement, they will all get some sort of bonus. Um the catch is that it will be paid in three installments this year, next this I believe this later this year, then next May, then the following May. And so, in order to get your entire bonus, uh you kind of you have to stick around till May 2028. So, there's always a hat a

catch. There's always a hook. Um but that is where we're at. And so, now employees who just shipped this massively successful game will get to get will get rewards out of it. And there are more kind of financial incentives and there's there's a a more attached to this, but essentially they are getting paid their bonuses. Everybody is getting paid and obviously as a result of the settlement, Ted Gill and Charlie Cleveland and Max McGuire, they get to write off into the sunset and they also get paid and Ted Gill does not is no longer at the studio. I it's very hard to imagine that he could have stayed that it was a very tenable position to continue working for Crafton after they fired you and after after you have been through all of this. So I understand why he left as part of part of this whole shebang. And that's where we're at. And now the legal drama is is over at least for now unless something unexpected pops up. This $250 million settlement has been has been our $250 million bonus has been kind of the the the verdict of that has been determined and now Subnautica 2's

developers can just keep working on the game as it eventually heads to 1.0. The final capper I'll say is that I think the craziest part of what is a pretty crazy story is that Unknown Worlds Entertainment convinced Crafton to spend $500 million plus a $250 million bonus to buy them. That is pretty wild, but maybe that's the story for another day. Be sure to check the show notes for all of my Bloomberg articles and you can read more about what happened here and how this story unfolded and I will see you all next time.