OpenAI Ditches For-Profit Plans, Keeps Non-Profit Control After Intense Backlash
OpenAI abandons plans for transition to a profit-driven corporation
In a dramatic turn of events, OpenAI, the trailblazer in AI technology, announces abandoning its bid to become a for-profit entity. The masters behind the popular ChatGPT will remain under the watchful eye of a non-profit board following heated criticism from tech maverick Elon Musk and other stakeholders.
The AI powerhouse has been caught in a stormy battle over its future, with its CEO Sam Altman squaring off against Musk, former employees, AI researchers, and more. OpenAI, having recently raised funds at a staggering $260 billion valuation, argued the need for a streamlined corporate structure to attract more investment. However, critics argue this move would compromise the group's mission to ensure AI benefits humanity without the non-profit board's oversight.
On Monday, OpenAI disclosed it would transform the status of its for-profit subsidiary. This change means investors, including Microsoft, and employees will own conventional equity stakes instead of having a stake in the company's profits. The non-profit will also secure a substantial stake in the for-profit unit, which will reincarnate as a Public Benefit Company (PBC) - a format dedicated to pursuing social good alongside profits.
Musk, who parted ways with OpenAI in 2018, has vowed to hinder the company's transformation into a for-profit business. He filed a lawsuit in California alleging breach of contract and fraud concerning the conversion. Musk has also lobbied for an open auction of OpenAI's non-profit assets and even submitted a hefty $97.4 billion bid to seize control of the group.
When questioned about the decision, Altman stated that external pressure was not the driving force. "We're all fixated on our mission," Altman retorted, "You're all obsessed with Elon."
Besides tackling the legal contests, OpenAI must also navigate complex negotiations with attorneys-general in Delaware and California and discuss the conversion's terms with Microsoft investors. The attorneys-general have demanded assurances that OpenAI would remain committed to its charitable purposes during any conversion and that the non-profit's assets would be fairly valued.
Delaware's Attorney-General Kathy Jennings expressed relief over the matter, stating that her primary concern had been to ensure the public remained the ultimate beneficiary.
OpenAI's extraordinary growth necessitated "much more capital than we initially envisioned" when the company began as a research lab a decade ago, Altman conceded. Launching its for-profit subsidiary in 2019 opened the doors for external investors to back the company in exchange for a share of profits. After the launch of ChatGPT in 2022, the competition in AI development soared, prompting OpenAI to seek billions to stay competitive with tech giants such as Google, Anthropic, and Musk's xAI.
Notably, OpenAI's latest financing rounds contain provisions requiring the company to convert into a more traditional structure. Should the transition occur, investors in both rounds will receive equity in the PBC, proportionate to the cash they have invested. Delays or disruptions could result in investors seeking refunds or, in the case of SoftBank, cutting its commitment by $10 billion if the process is not completed by the end of the year.
OpenAI still engages with Microsoft over the size of the stake the US tech giant will hold in the PBC and works with independent advisors and attorneys-general on the non-profit's stake. Despite the challenges, OpenAI expresses optimism about finishing the transition this year.
In light of intense backlash, OpenAI decides to maintain its non-profit status, abandoning the plan to become a for-profit entity. Elon Musk, a former OpenAI board member, has been a key critic of this change.
In a significant shift, OpenAI's for-profit subsidiary will now offer traditional equity stakes to investors like Microsoft, rather than a share in the company's profits. The non-profit will also secure a substantial stake in this reformed entity, which will operate as a Public Benefit Company (PBC).
Delaware's Attorney-General Kathy Jennings expressed relief, stating that her primary concern was ensuring the public remained the ultimate beneficiary. OpenAI also faces negotiations with attorneys-general in Delaware and California regarding conversion terms and assurances that the company stays committed to its charitable purposes.
As OpenAI navigates legal contests and negotiations, it aims to complete the transition to a PBC this year, making it possible for investors to receive equity proportionate to their investments. However, delays or disruptions could lead to investors seeking refunds or, in the case of SoftBank, cutting its commitment by $10 billion if the process is not completed by the end of the year.
