OpenAI is now a for-profit company and the implications are not yet understood for their nonprofit arm
- By Леонидас
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Power is everything.
OpenAI has put an end to its controversial reorganization plan, and now its efforts are being put into the creation of new technologies. The company stated that it will no longer try to separate its for-profit arm from the nonprofit board that currently oversees it. "After speaking with civic leaders and following a productive conversation with the Offices of the Attorneys General of Delaware and California, we decided that the organization shouldn't split off the for-profit," said Bret Taylor, the chairman of OpenAI.
OpenAI had previously said that its present structure would not allow a nonprofit to “effectively do much more than control the for-profit.” The fact that it would need more money was made even more apparent by the company’s need for additional funds two months after accumulating $6.6 billion in new investments. In a December blog post, the company mentioned that they would require “funding beyond our own expectations” and that if investors wanted to support us, they needed traditional equity at this scale of capital as opposed to customized structures.
Under the previous plan, the nonprofit would retain total control of the for-profit entity, which would have given it whatever control came with the amount of stock it received in the reorganization process.
This part of OpenAI’s proposal has fueled the controversy around it, with many—former employees as well as labor and nonprofit groups, even Elon Musk—disagreeing with this. "How does the nonprofit control be maintained? How is that mission going to be served?" asks Jill Horwitz, a visiting professor of law at Northwestern University. "From the press, we know that OpenAI will appoint all the directors of the operating entity. Will they do so in perpetuity? Who will they appoint? Will it be self-perpetuating? Can the for-profit investors have a say in who the directors are?"
In other words, OpenAI hasn't said what structure it will actually adopt. According to Michael Dorff, a professor at UCLA and Executive Director of the Lowell Milken Institute for Business Law and Policy, there are several options for the company to consider.
"If you had one class of stock, one vote per share, they would elect a board. You could just give the nonprofit the majority of the shares, and then they would then elect a majority of the board. They would therefore be in charge, at least for a while," he says.
"A little better governance could probably be achieved by having dual class shares, where the nonprofit would have a class of stock and they would be the only owners of that class of the stock that is either super voting shares, again, giving it a majority, or even better, you can define a class of stock and say it has the right to elect a majority of the board."
In essence, OpenAI's plan doesn't say how the company will ensure the nonprofit retains control. The nonprofit may have a "large" stake, but there are many ways this stake could be diluted. Even if we ignore the idea of an IPO for now, the company could still issue new shares or split its stock. In these scenarios, the nonprofit would lose control of the company unless OpenAI had special shares.
According to Bloomberg, Microsoft has yet to sign off on OpenAI's proposal. The company has invested nearly $14 billion in OpenAI. As part of its funding round last October, OpenAI had two years to shift to a for-profit business. If it did not, the $6.6 billion that it raised would convert to a debt. Control is likely very much still on the table in discussions between Microsoft and OpenAI, given that the latter’s financial future hangs in the balance. Further complicating any agreement is that the two parties will also need approval from the state AGs in California and Delaware.
"We look forward to working out the details of this plan in ongoing discussions with [the state AGs], Microsoft, and our new nonprofit directors," Altman added in the letter.
Most of OpenAI’s original plan remains intact. The organization will still restructure its for-profit subsidiary as a public benefit corporation. OpenAI intends to get rid of the existing profit cap structure that limits investor returns to 100x the principal and reserves surplus profits for the nonprofit. OpenAI has yet to generate a profit; it recorded about $5 billion in losses in 2021.
"This is not a sale, but a simplification of structure," wrote OpenAI CEO Sam Altman in a letter to employees that was shared by the company. Instead of the complex capped-profit structure that we have now — which made sense when it seemed like there might be one AGI effort to rule them all but doesn’t anymore, given all the great AGI companies — we are evolving to a normal capital structure with everyone holding stock.
