I know we've covered how family, parent/children dynamics are different in Erfworld and don't map well to Earth, but good gracious that was heart-wrenching to read... poignant, and definitely geared for Earthworlders. At the same time, it also builds up the character of the Don, whose people skills seem to be really top notch. I really liked this update, it has fantastic imagery and pacing.
As to why they would even bother to negotiate:
It is easier to conquer the world if you show people a carrot alongside the stick. If folks feel like they have nothing to lose, they go all out, they get clever, they act unpredictably (by say, spending the vast majority of the treasury on summoning the perfect warlord). By offering alliance alongside a worldbeating army, GK changes the dynamic from an us vs. the juggernaut which cannot be stopped or reasoned with into a more standard alliance battle. We're stronger than you, and we have this goal, team with us, and we'll leave you relatively unmolested. Yes, the philosophy is a little weird and you'll lose your title, but that's it! You'll still have your lands, and your lives. With this Army and the best tactical mind in Erf (Ansom, as far as they know) we're not going to lose! Make it easy on yourself. Also, Ansom (and other decrypted) have "seen the light" as it were, perhaps they made an argument (or an appeal in the daughter's case) to try and "save" their family, and Wanda and Parson were willing to let them try it (since Parson knows that knowledge isn't worth that much, at least to Charlie, the foremost information broker on Erf).
GK also had what they viewed as leverage -- the former royal heir. If familial relations are even remotely as strong as they are here on Earth (traditionally speaking), the offer to return what has been lost, might seem an insurmountable temptation to Monarchs known to be affectionate towards their heirs. This I think also builds up Unaroyal's Queen even moreso in my mind, that she recognizes the clear abomination that decrypting is, and gives a powerful voice to the royalist argument.
This would've been a good strategy... if GK could have an inter-hex way of croaking the queen after negotiations had broken down (I understand the way they had set it up here, turn based movement prevents it). That way, the story doesn't get out, and GK doesn't lose the Decryption trick, sure other sides would no longer be willing to parley, but with a letter like that (which if the Don is smart will be halfway across Erf by the next turn), they've lost that ability anyways with royal sides.
As to disbanding her side:
Is it spite, or a mercy in her eyes? That they be spared the fate of her daughter, or her chief warlord, to be eternal servants of the Croakamancer / Arkenpliers until some brave soul manages to free them from their bondage? It all depends in how you look at it. Is decrypting a new lease on life, or an unholy extension of it, denying a unit its rightful place in the afterlife/city of heroes/what-have-you?