OpenAI is considering moving from a nonprofit to a for-profit company, and its deep backer Microsoft (MSFT) stands to gain more if ChatGPT developers get permission to act more like a startup. You will get it.
“Anything that frees up OpenAI to focus on profits is likely to benefit Microsoft’s investment in the company,” said Sarah Kreps, director of the Technology Policy Institute at Cornell University’s Brooks School of Public Policy. said.
A restructured business structure would give Microsoft an opportunity to renegotiate its already generous profit caps and negate its interest in general artificial intelligence (GAI) developed by OpenAI, another person said. The clause will also be abolished.
“(OpenAI) has clearly stated that the nonprofit no longer has control, so perhaps that means Microsoft and other investors will have more say in OpenAI’s activities,” said the University of California, Los Angeles. said Rose Chan Rui, founding executive director of. Lowell Milken Center for Philanthropy and Nonprofit Organizations.
Microsoft CEO Satya Nadella (right) speaks as OpenAI CEO Sam Altman looks on at the OpenAI DevDay event in San Francisco last November. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)
But as OpenAI seeks to shed its philanthropic shell, it could pose a hurdle for Microsoft.
OpenAI’s huge valuation, maze of for-profit subsidiaries, and potentially risky technology would make any transition to for-profit legally and publicly complex, potentially leading to pushback from regulators. .
Still, OpenAI investors see plenty of upside potential. On Wednesday, the company announced it had raised about $6.6 billion in its latest funding round, valuing the Sam Altman-backed company at $157 billion. However, that valuation will largely depend on whether OpenAI becomes a commercial company.
whirlwind of change
OpenAI is in the midst of change.
The company has experienced a period of executive turnover, including the recent departure of Chief Technology Officer Mira Murati. It also faces increased competition from rivals such as Google (GOOG, GOOGL) and Amazon-backed (AMZN) Anthropic.
Reclassification as a for-profit organization would be another seismic shift for OpenAI, upending the way it was established nearly a decade ago.
It was founded in 2015 as a nonprofit organization under the name OpenAI Inc., honoring its mission to advance humanity rather than profit.
OpenAI’s certificate of incorporation states that “the company is not organized for the private benefit of any individual” and also includes a commitment to keep its technology open source for the public benefit. It is attached.
Things evolved in 2019 when OpenAI CEO Sam Altman and his team created a for-profit subsidiary to raise outside venture capital, including billions of dollars from Microsoft.
the story continues
Although this for-profit subsidiary is technically owned by a holding company owned by OpenAI’s employees and investors, it does not give its largest backer (Microsoft) a board seat, and it does not give a seat to the nonprofit organization and its board of directors. It was organized in such a way that it remained under the control of And they have no voting rights.
The inherent tension between these two parts of the company contributed to a dramatic boardroom clash in 2023. At that time, Altman was fired by the board and reinstated five days later.
In the aftermath, Microsoft took a non-voting observer position on OpenAI’s board, but relinquished that seat this year as both OpenAI and Microsoft came under increased regulatory scrutiny. Ta.
The idea of upending the current structure has already attracted the attention of regulators in the US and Europe, with scientists and businesses warning that machine learning techniques like those developed by OpenAI should be made accessible to the public. It is exacerbating ideological rifts among leaders.
They argue that this technology poses an existential threat to humanity and should therefore be operated under public supervision.
OpenAI CEO Sam Altman during a 2023 Senate Judiciary Subcommittee Privacy, Technology, and Law Subcommittee Hearing. (Bill Clark/CQ-Roll Call, Inc via Getty Images) (Bill Clark via Getty Images)
OpenAI and Microsoft are also involved in an ongoing investigation by the US Federal Trade Commission over concerns that AI market consolidation will “distort innovation and undermine fair competition.”
Additionally, multiple calls have been made to the California Attorney General to investigate the legality of OpenAI’s business structure. One of them comes from Elon Musk, who co-founded OpenAI with Altman. He sued OpenAI, Altman, and 21 of OpenAI’s designated subsidiaries.
Musk said the defendants fraudulently promised that their $100 million investment in OpenAI would be used for the public good.
OpenAI’s transition to for-profit status could also attract the attention of the Internal Revenue Service, given OpenAI’s tax-exempt status as a charity.
“Did they get fair market value?”
One of the unknown questions is how much direct return Microsoft will be able to derive from its investment.
By law, nonprofit organizations must use their assets only for stated charitable purposes. In addition, OpenAI’s assets, including all OpenAI subsidiaries, may not be sold for less than fair market value.
What regulators want to know is, “Was the fair market value of the asset obtained at the time?” Gene Takagi, principal at NEO Law Group, says:
Chan Loui added that regulators will require OpenAI to realistically value its assets, including residual interest. And she suspects that number exceeds OpenAI’s latest valuation.
“I think the most sensitive issue is probably how to deregulate nonprofits,” she says. “And I think the best way to avoid disputes related to reorganization is to adequately compensate nonprofits,” Zhang Rui said.
“I think that’s the best way for them to get the people on their side, get the states on their side, get the IRS on their side.”
Elon Musk looks on at the Milken conference in May. Reuters/David Swanson/File Photo (Reuters/Reuters)
What OpenAI is expected to do as part of the transition is register as a public benefit corporation.
Rick Alexander, a veteran corporate structure attorney and founder of Shareholder Commons, says these organizations are similar to traditional corporations, but with more freedom to spend on civic-minded initiatives.
“This is a permission structure,” Alexander said.
Other public interest corporations 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 greatly benefit from this change. In May, xAI raised $6 billion.
“This type of transition could quickly garner significant investor interest,” Krebs said. “This is a very 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 reporter at Yahoo Finance. Follow Alexis on X @alexiskweed.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter @Daniel Howley.
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