OpenAI said on Monday it is pursuing a new restructuring plan after conversations with Delaware and California’s attorneys general, both of whom were closely watching as OpenAI tried to break free of its odd corporate structure.
Currently, OpenAI’s nonprofit board governs the organization’s for-profit operations. Under the new plan, OpenAI’s for-profit arm will become a public benefit corporation (PBC), but will still be controlled by OpenAI’s nonprofit.
The new restructuring plan may be enough to appease regulators and OpenAI’s investors, who’ve poured billions into the company in expectation of a return someday. But it could also throw a wrench into OpenAI’s future plans, particularly if the company seeks to one day go public.
The IPO route
Last December, OpenAI outlined a path that would’ve allowed it to spin its for-profit arm out from under the control of its nonprofit board, which is bound by certain obligations, including a clause in its charter to ensure that artificial general intelligence benefits all humanity.
That plan went out the window on Monday. Now, OpenAI intends to have its nonprofit control and also be a large shareholder of the aforementioned PBC.
Besides allowing OpenAI to operate more like a conventional company, a simpler structure could open the door to OpenAI raising additional capital by going public via an IPO. Given OpenAI’s scale, the huge amount of cash it burns, and the public’s massive interest, an IPO seems like something OpenAI might eventually explore.
Stephen Diamond, a corporate governance professor at Santa Clara University, told TechCrunch there’s a very narrow path to OpenAI becoming a public company under its newly proposed transition plan. While nonprofits can’t go public, PBCs can.
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However, there is a question as to what OpenAI’s PBC would own were OpenAI to IPO.
“My sense is there’s enormous intellectual property value at the OpenAI nonprofit level,” said Diamond in an interview. “But if the PBC doesn’t own and control the core IP, but are just licensed to use it, then what’s the IPO? That’s the challenge.”
Diamond noted that we don’t know the exact details of OpenAI’s plan, and that it’s unclear if it’ll even be successful in the end. In an email to TechCrunch, OpenAI spokesperson Steve Sharpe said OpenAI’s nonprofit will continue to control the company’s technology and that while OpenAI has no intention of going public at this time, an IPO would be “theoretically” possible under the proposed structure.
If OpenAI’s nonprofit really is in control of the organization’s critical technology, shareholders wouldn’t have much of a say in the company’s decisions, said Rose Chan Loui, the founding executive director for UCLA’s Law Program on Philanthropy and Nonprofits. Unlike buying stock in a typical company, shareholders in OpenAI would have to know that their influence over the corporation is limited.
“I think an IPO is much harder in this scenario,” said Loui in an interview with TechCrunch.
Bending to pressure
OpenAI has been squeezed on all ends during its attempted restructuring.
Just last week, a group of former OpenAI employees asked California and Delaware’s AGs to block the startup’s conversion, claiming it was at odds with OpenAI’s charitable roots. Both AGs told TechCrunch that they’re reviewing OpenAI’s new plan.
OpenAI’s proposal also needs to appease the company’s largest private investors, including Microsoft and Softbank, whose multi-billion-dollar investments reportedly hinge on OpenAI getting some sort of restructuring over the finish line. OpenAI’s new plan gives the company a more conventional capital structure, meaning employees, investors, and the nonprofit will hold equity directly.
Microsoft has not yet given its blessing to OpenAI over the new corporate structure, Bloomberg reported on Monday. The cloud provider wants to ensure the new structure adequately protects its multi-billion dollar investment in OpenAI. It’s unclear if other key stakeholders have approved the deal.
No one has put more pressure on OpenAI’s restructuring than Elon Musk. The billionaire who co-founded OpenAI and now competes with it through his AI startup xAI submitted a $97 billion takeover bid to raise the price of OpenAI’s nonprofit assets and gum up the ChatGPT maker’s for-profit transition. Musk has also made OpenAI’s restructuring a focal point in his lawsuit against the startup and Microsoft. At its core, Musk’s lawsuit accuses OpenAI of abandoning its nonprofit mission to develop AGI and distribute it broadly.
Last week, a federal judge denied several of OpenAI’s motions to dismiss claims in Musk’s suit. According to Diamond, this was a modest win for Musk, and may have played a role in OpenAI’s changing course. However, in a briefing with members of the press on Monday, Altman reportedly denied the suit had any impact on OpenAI’s plans.
Marc Toberoff, Musk’s lead counsel in his case against OpenAI, told TechCrunch the new corporate restructuring plan “changes nothing,” implying that Musk won’t be so quick to drop the case.