OpenAI is considering transitioning from a nonprofit to a for-profit company, and Microsoft (MSFT), its donor, will have a lot to gain if a ChatGPT developer gets the green light to operate as a startup.
“Anything that frees OpenAI to focus on profit is likely to benefit Microsoft’s investment in the company,” said Sarah Krebs, director of the Technology Policy Institute at Cornell University’s Brooks School of Public Policy.
The reshaped business structure would give Microsoft the opportunity to renegotiate its already generous profit cap, as well as discard the clause that states… Microsoft denies interest In OpenAI created General artificial intelligence (GAI), according to another observer.
“(OpenAI) is clearly saying that the nonprofit will no longer be in control, so that should mean that Microsoft and other investors will have more of a say in what OpenAI does,” said Rose Chan Lowe, founding executive director of the UCLA center. Lowell Milken Center for Philanthropy and Nonprofit Organizations.
But there are potential hurdles for Microsoft as OpenAI tries to shed its philanthropic mantle.
OpenAI’s massive valuation, maze of for-profit subsidiaries, and potentially risky technology make turning for-profit legally and publicly complex — and could lead to opposition from regulators.
However, OpenAI investors see plenty of upside. The company announced Wednesday that it has raised about $6.6 billion in its latest funding round, valuing the Sam Altman-helmed company at $157 billion. However, this assessment is largely dependent on OpenAI becoming a for-profit entity.
Whirlwind of change
OpenAI is in the midst of a whirlwind of change.
It is experiencing an extended executive exodus, including, most recently, the departure of chief technology officer Mira Moratti. It also faces increasing competition from rivals including Google (GOOG, GOOGL) and Amazon-backed Anthropic (AMZN).
Rebranding into a for-profit structure would be another seismic shift for OpenAI, upending the way it was founded nearly a decade ago.
It began in 2015 as a non-profit organization under the name OpenAI Inc., in reference to its mission of advancing humanity rather than pursuing profits.
“The Company is not organized for anyone’s private gain,” OpenAI’s certificate of incorporation says in its regulatory documents, along with a promise to keep its technology as an open source for the public benefit.
Things took a turn in 2019 when Sam Altman, CEO of OpenAI, and his team Established a for-profit subsidiary To raise outside venture capital – including billions from Microsoft.
It is structured in such a way that the for-profit subsidiary, technically owned by a holding company owned by OpenAI employees and investors, remains under the control of the nonprofit and its board while giving its largest backer (Microsoft) no seats on the board. Nor the power of voting.
It is the inherent tension between these two parts of the organization that contributed to a dramatic boardroom tussle in 2023, when the board ousted Altman and then reinstated five days later.
In the aftermath, Microsoft took a non-voting observer position on OpenAI’s board, but gave up that seat this year as both OpenAI and Microsoft came under more regulatory scrutiny.
The idea of upending the current structure has already attracted interest from US and European regulators, and has exacerbated the ideological divide between scientific and business leaders who warning That machine learning techniques like those developed by OpenAI must remain accessible to the public.
They argue that technology poses an existential threat to humanity and must therefore be operated in a way that is subject to public scrutiny.
OpenAI and Microsoft are also part of the research team’s ongoing investigation US Federal Trade Commission Because of concerns that AI market consolidation “distorts innovation and undermines fair competition.”
And multiple Calls It has been submitted to the California Attorney General to investigate the legality of OpenAI’s business structure. One came from Elon Musk, who co-founded OpenAI with Altman. He has filed a lawsuit against OpenAI, Altman, and 21 OpenAI affiliates.
Musk said the defendants fraudulently promised that his $100 million investment in OpenAI would be used for public benefit.
OpenAI’s move to for-profit status could also attract the attention of the Internal Revenue Service, given that OpenAI is granted tax-exempt status as a charitable organization.
Did they get fair market value?
One unknown question is the extent to which Microsoft will be able to directly profit from its investments.
By law, a nonprofit must use its assets only for its stated charitable purposes. The OpenAI assets, which include all OpenAI subsidiaries, may not be sold for anything less than fair market value.
The question the regulators want to confirm is: “Did they get fair market value for the asset at that time?” said Jin Takagi, Director, NEO Law Group.
Regulators will ask OpenAI to realistically value its assets, including residual interests, Chan Lowe added. She suspects this number may exceed OpenAI’s latest assessment.
“I think the biggest sensitivity probably has to do with how you remove the control of the nonprofit,” she said. “And I think the best way to avoid restructuring conflict is to adequately compensate the nonprofit,” Chan Lowe said.
“I think this is the best way for them to get the public on their side, the states on their side, and the IRS on their side.”
What OpenAI is expected to do as part of the transformation process is to register as a public benefit corporation.
Such entities are similar to traditional corporations but with more freedom to spend on civic-minded initiatives, according to Rick Alexander, a veteran corporate structuring lawyer and founder of Shareholder Commons.
“It’s a structure then,” Alexander said.
Other public benefit companies include Elon Musk’s xAI, Warby Parker (WRBY), Allbirds (BIRD), Lemonade (LMND), and Etsy (ETSY).
And based on the success of Musk’s XAI, OpenAI could benefit greatly from the change. In May, xAI raised $6 billion.
“This type of transformation can quickly generate significant investor interest,” Krebs said. “This is a capital-intensive industry, so anything OpenAI can do to attract investment will act as a positive feedback loop and accelerate its benefits.”
Alexis Keenan is a legal correspondent for Yahoo Finance. Follow Alexis on X @alexiskweed.
Email Daniel Hawley at dhowley@yahoofinance.com. Follow him on Twitter at @Daniel Holly.
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