- OpenAI is transitioning to a for-profit company so it can raise billions more in funding.
- The company has operated under a nonprofit board since its launch, adding a for-profit arm in 2019.
- It’ll need to take several steps as part of this change.
OpenAI took the tech world by surprise — again — when it announced last week that it was changing its governance structure and going all-in on profit for social good.
Since its launch in 2015, OpenAI has operated under the supervision of a nonprofit board, with a mission to develop artificial general intelligence that is safe and benefits humanity. It added a for-profit arm in 2019 to help it raise money to fund that mission.
Tensions grew between the nonprofit purists and those who wanted to move more quickly to develop and release products. It all came to a head last November when CEO Sam Altman, who his former coworkers have said subscribes to a more aggressive development approach, was briefly ousted by the board.
Almost a year later, many of those who disagreed with Altman’s approach are gone, and OpenAI is transitioning into a fully for-profit company. It is also trying to raise a fresh round of $6.5 billion in funding from tech giants like Microsoft, Nvidia, and several venture firms under the stipulation that in two years, it will become a public benefit company. The nonprofit will remain but retain only a minority stake. It seems OpenAI’s backers are intent on seeing returns on their investments.
It’s an unprecedented shift for an unprecedented company, but the AI race has ushered in some unusual times.
There are several complex steps the company will need to take to make this change in under two years. Here are some of the most critical ones:
Asset Conversion
When a nonprofit converts to a for-profit entity, it must ensure that it retains assets equal in value to what it transfers to the for-profit. In OpenAI’s case, this also includes assets like patents on technology. OpenAI’s operations would likely be sold to the for-profit, with the nonprofit keeping the proceeds. “Assets previously donated to the public benefit cannot be repurposed to private benefit without compensating the public for the loss,” Alexander Reid, a partner at BakerHostetler, told The Wall Street Journal.
Equity
Right now, OpenAI’s investors are set to receive a cut of its future profits, but it will need to translate those stakes into equity in the new company. Microsoft’s more than $13 billion investment in OpenAI means it would have a sizable amount of equity in the new structure, which might warrant antitrust regulation, the Journal reported.
Altman’s equity
Under the new structure, Altman is set to get equity in the company. Reports have suggested that discussions have been underway at OpenAI to give Altman a 7% equity stake, valued at some $150 billion. Altman dismissed those reports as “ludicrous,” according to The Information. If true, the size of that stake could raise a few eyebrows among the public, as the company will still be committed to building technology for the public good.
Governance Structure
OpenAI will need to make decisions regarding the governance of the new for-profit entity and its relationship to the nonprofit. It’ll also need to decide who would govern the new nonprofit and where the nonprofit would direct its resources.
Legal Changes
OpenAI must also change its structure under Delaware law. The good news is that changing should be the easiest part of the process because Delaware has business-friendly laws, Jill Horwitz, a professor at UCLA, told the Journal.
Ongoing Litigation
OpenAI must address legal challenges that could impact its transition, including a lawsuit from Elon Musk, which claims that OpenAI and its cofounders, Altman and Greg Brockman, put commercial interests ahead of the public benefit.
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