Undead Labs becomes employee-owned after Xbox divests State of Decay studio

Undead Labs, which operates offices in Seattle, Champaign, Illinois, and Orlando, Florida, became employee-owned after Xbox announced plans to divest the studio in July 2026, and studio head Philip Holt said the company had just over 100 employees before the split and fewer after layoffs in September 2026, with State of Decay 3 still targeting a 2027 release.

Holt said he received only a small amount of warning before the public announcement, though the news still came as a shock. The disclosure created a deeply unsettling atmosphere, with employees dwelling on the fear of unemployment and worrying they might never get a chance to ship State of Decay 3 after years of work.

To reduce uncertainty, Holt decided to be fully transparent with employees about what was happening in the months that followed. There was a period of weekly updates to the whole company, along with direct and candid conversations, and Holt said the openness settled people down and strengthened bonds of trust. Holt described the three-month transition to independence as harrowing and a serious act of will.

At first, Holt and Microsoft explored the possibility of finding an outside buyer, and Holt said Microsoft was initially interested in securing an acquirer. Holt believed that because Undead Labs was close to shipping State of Decay 3, employees could put together a credible offer to control and own the company. The studio talked to investors both while Microsoft shopped the studio and while Undead looked for an investor to bring in cash.

Because Undead Labs was pre-revenue, many investors wanted control or a majority position, so the studio shifted to looking for publishing money. Publishing money was slightly easier to come by, although not by much, according to Holt. Holt recalled thinking that if State of Decay 3 could not finish, something was deeply wrong with the industry, though he called that an unhelpful frame.

He spent 100 percent of his time after the divestment news on getting a deal done rather than debating whether Microsoft had made the right decision. State of Decay 3 has a 2027 release window, and Undead Labs eventually landed an agreement with an as-yet-unnamed publisher for the game. Holt said that between cash on hand and publishing money, the studio could finish the game without outside investors.

Undead Labs has taken no outside investors, which Holt described as remarkable, and the studio is now employee-owned. Holt said they registered a new company, basically a Delaware C corporation, which acquired Undead Labs, and they are issuing equity to all employees. Many factors determine share ownership, and Holt said he does not have a majority stake.

Undead Labs created multiple classes of stock with super voting rights so Holt can hold minority ownership while retaining voting control. The structure leaves more shares for employees, allowing Undead to be more generous in equity distribution. Employees can sell shares back to the company, would receive a windfall if a buyer bought the firm, and might receive future dividends.

Holt called the new structure a strong motivator and said the studio must earn commitment, not command it, making that the corporation’s objective. He stressed that employee ownership increases motivation and makes industry economics more present in daily work because people work for themselves. Being employee-owned means the studio is not in the pocket of investors who demand constant growth and multiple returns on capital.

Undead Labs conducted a significant number of layoffs in September 2026, but Holt refused to disclose the exact figure. TweakTown reported that the principal factor behind the layoffs is higher cost of living adjustments across the United States, which have driven up personnel costs.

Undead Labs had just over 100 employees before the divestment and now has fewer as of October 2026. The studio has offices in Seattle, Washington; Champaign, Illinois; and Orlando, Florida, with remote employees in California and North Carolina, and works with co-development partner Wushu Studios in the UK.

Holt said Undead Labs has always been lean for its level of ambition and that sizing the team to the opportunity is his job. He said Undead Labs follows the small central team model in principle, but he noted the question of how small the central team should be depends on the game. He said institutional knowledge gained by building something internally is a major part of team value because documentation always trails and knowledge sits in people’s heads.

Holt cited Matt Booty’s view that the number one predictor of success is whether a team has shipped together before, warning that a small team reliant on external partners gives that expertise away. Holt said Undead Labs makes an investment in external partners not only in cash but in building expertise, and wants those relationships to be long-term. He acknowledged that the West Coast of the United States remains one of the most expensive places to make games and that developers can make games more cheaply elsewhere.

Philip Holt has been Studio Head of Undead Labs since May 2020. Holt announced State of Decay 3 in 2020 as a marker on the table because he feared Microsoft would continue acquiring studios and potentially divest Undead Labs before the game could be shown publicly. Holt’s fear of the studio being divested before the game could be presented motivated the early announcement, and the game’s long development was partly due to a pivot away from an MMO structure.

Initially, a third party was expected to buy Undead Labs after the Xbox divestment, but the plan changed when Holt proposed a management buyout instead. Holt submitted the proposal after seeing other studios do the same, and Microsoft approved of the idea. Holt said the studio received a lot of interest from many parties but ultimately chose the employee buyout path.

Holt said he once heard about a game that cost $10 million to build, which led him to realize Undead Labs is not in the unit cost business but in the business of entertaining an audience. He said the direct relationship between an independent studio and a community of players is the path Undead Labs believes can lead to success, though he said claiming it as the industry model would be arrogant.

Holt said as an independent studio there is a cleaner, clearer line of sight to the audience, with no boss to answer to other than the players. He said independence brings the studio closer to its community and lets them focus on making the best games and earning continued player support. Holt said, “Now it’s just: make the best possible game.”

He said Undead Labs does not need a four or five times return on invested capital, but must generate enough profit to pay employees well and support the publisher. Holt said he referenced an Iron Maiden anecdote to explain that Undead Labs’ primary concern is making games and serving their audience, not profits.

Holt worked at ArenaNet, the Guild Wars maker, and said he has deep respect for teams that make successful MMOs because he has seen them swallow people whole. State of Decay 3’s development pivoted away from an MMO structure envisioned by founder Jeff Strain, who left in 2019, requiring the team to rewrite the entire game. Only a handful of people worked on State of Decay 3 when its trailer came out in 2020, while most of the team supported State of Decay 2 up until 2024.

Holt said the studio has built the current version of State of Decay 3 since roughly 2022 or 2023, and the studio is unlikely to spend as much time on the next game. Measuring from State of Decay 2’s release, development is approaching eight years.

State of Decay 3 has a 2027 release window and will launch on PC, PlayStation 5, and Xbox Series S and X. The game is in alpha with around 8,000 players currently testing it, and the studio is working on a post-launch roadmap. A planned closed beta is scheduled for the end of 2026.

Holt insisted the studio has everything it needs to ship State of Decay 3 and is pretty close to finishing the game. Undead Labs eventually landed an agreement with an as-yet-unnamed publisher for State of Decay 3, and Holt called the unnamed publisher a fantastic partner, hoping for a long-term relationship on the franchise. Holt said the capital needed to finish State of Decay 3 was not insurmountable, making the employee buyout possible.

The State of Decay franchise has reached 25 million players across both games, a figure Holt said may surprise people who know of the series but have not played it. Holt credited Game Pass with partly driving the series’ success to 25 million players, noting that thousands of new players still enter the game daily.

State of Decay 2 reached 1 million players in two days after release and eventually grew to over 10 million players.

Holt said roughly half of monthly active users have been in State of Decay for close to two years and a quarter for more than five years. He said the biggest investment in State of Decay 3 is four-player co-op shared world, which serves as a growth vector since players can invite friends across platforms. State of Decay 2 did exceptionally well on Game Pass, but the sequel addressed technical limitations of the second game.

Holt said State of Decay has never been a game that sells hardware, and the studio is ensuring a broad baseline spec so the game reaches players on older consoles and PCs. He acknowledged that more than $1,000 consoles are becoming the new normal but said the studio is ensuring State of Decay 3 reaches players on older hardware. IGN’s Michael Highham played a 30-minute demo of State of Decay 3 at Gamescom in August 2026 and reported positive impressions of improved gunplay and movement.

Xbox CEO Asha Sharma acknowledged that Game Pass contributed to a free fall in the division’s balance sheet, though the service worked well for some games like State of Decay. As part of Xbox’s restructuring, Activision is now taking over development of Halo, and Activision has placed Rare under its umbrella. Xbox gave Double Fine full ownership of its IPs in its amicable separation from Xbox and has managed to stay afloat.

Holt said he does not spend time thinking about Microsoft’s current strategy, noting it appears the company is coalescing around its mega franchises. He said he is not debating whether Microsoft made the right decision.

Holt said there is plenty to figure out about State of Decay 3’s path to launch and what success will look like once the game is live.