OpenAI Attempts to Have Their For-Profit Cake and Eat It Too
It's not exactly shocking, but it is surprising. OpenAI has effectively laid down their arms in the fight to become a for-profit. Instead, they'll seek to move to a structure they believe will get most of what they wanted out of such a maneuver, without fully maneuvering it.
At least, that's how it sounds right now. I suspect there's going to be a lot of back and forth around all of this in the coming days, weeks, and months. But clearly Sam Altman believes – or wants everyone else to believe – that shifting OpenAI's for-profit arm to a Public Benefit Corporation, while still allowing the non-profit to have effective control over that entity, will square the circle. We'll see.
What's clear is that OpenAI didn't think they were going to win the battle to invert the company and become a full for-profit with a non-profit arm. Elon Musk threw a wrench in this plan, but many others held wrenches here too. As it turns out, there's a lot at stake and a lot of potential stakeholders when you're talking about a $300B non-profit!
Removing the cap on the potential profits that the non-profit would potentially earn one day (lol) seems straightforward enough as that whole structure was silly to begin with. But less straightforward is just about everything else here, most of which isn't stated in OpenAI's blog post on the matter. Will those holding the current rights to future profits be converted into actual equity holders in some way? This article by Cade Metz of The New York Times suggests that may happen:
OpenAI said that it was still negotiating the nonprofit’s stake in the new corporation and that the nonprofit would pick the board members of the new entity.
It implies that the non-profit would hold an equity stake in the new PBC, and that such a stake would give it control. But there's a lot of variables in even just that. Would this non-profit hold 51% of the voting rights? More? Is that the same as the equity structure or would the non-profit be granted some kind of shares with out-sized voting rights? Or if it's straight equity control, might they be diluted below a controlling stake in a future fundraise?
Where does this leave Microsoft? The official blog post cites them once:
We made the decision for the nonprofit to stay in control after hearing from civic leaders and having discussions with the offices of the Attorneys General of California and Delaware. We look forward to advancing the details of this plan in continued conversation with them, Microsoft, and our newly appointed nonprofit commissioners.
I'm not sure how much Microsoft loves being named in such a group, as it implies they also have some level of control over OpenAI. But, well, they've given them $13B+ and likely would have been the largest shareholder in the for-profit full conversion. Oh boy, can't wait for their comment on this matter.
We do seemingly have some sense about how SoftBank – OpenAI's new main benefactor – feels about this, as multiple publications clearly asked Altman about that specifically. And he expressed nothing but confidence that not only was Masa Son behind such a move, but that they wouldn't be cutting off the funding spigot, even though they technically could without a full for-profit shift.
What about the other recent investors not named SoftBank? Do any of them ask for their money back? Here, I have to believe that OpenAI's actual metrics remove that risk. They may not be on exactly the ride they signed up for, but it's still one hell of a ride.
Will the actual states at the center of all of this – Delaware and California – be okay with this move? Can they even do anything about it if effective control is not changing? Is that sort of the point of all of this? So. Many. Questions.
It was just a few hours ago that I was writing about the possibility of Microsoft being on the verge of getting a large equity stake in OpenAI, and trying to piece together what that could look like:
I've also tried to do the math there previously, but it's harder because OpenAI is still a startup – albeit one valued at $300B – and doesn't have to file disclosures. And while Microsoft does, because of the even more unique structure of the OpenAI deal, they don't have to disclose their holdings in the company. Again, technically right now, they hold no equity. But they also don't even have a stake with as clear of a path to convert into equity, such as a convertible note.
At the same time, it seems like one way the conversion will play out is to treat these previous "profit share" investments as de-facto convertible notes. But it's even more tricky because Microsoft as well as OpenAI undoubtedly don't want such rights to convert into equity where Microsoft owns a controlling share of the company. OpenAI doesn't want that for obvious reasons. But for Microsoft, it would be a potential regulatory nightmare if that were to happen.
So my quick-and-dirty math guess has been that Microsoft ends up owning something around 33% of OpenAI if/when they convert. This is all even more muddled because of the non-profit which will still not only exist, but will hold a large portion of that equity as well in such a conversion – perhaps close to Microsoft's amount. At 33%, Microsoft's stake would be worth a nice and clean $100B. But even at 25%, it's worth $75B. With these numbers in mind, it's rather mind-boggling that Microsoft seemingly keeps working against OpenAI. Or, at the very least, is hedging like crazy – including, internally – and making life harder for the startup. Then again, maybe that will help paint a smoother regulatory picture if/when the conversion happens. "Even though we own a massive stake in the category leader in AI, we're still competing, see!"
Muddled indeed. Not only does the non-profit still exist, they still control the entity – which again, is actually good news for Microsoft, it seems. But is that good news for OpenAI? And will it allow them to raise the potential "trillions" that Altman cites going forward? Nobody knows.
Reading this, I certainly don't get the sense that OpenAI itself is fully confident in all of this – hence the seemingly out-of-the-blue blog post on the matter backtracking from the previously confident stance on the matter.
The first line of Altman's blog post is the only one I can cite with confidence: "OpenAI is not a normal company and never will be."
Update May 6, 2025: Well, it didn't take long for some reporting to dig up how Microsoft thinks about all of this. More analysis of this below...
M.G. Siegler