OpenAI thinks it has found a way to diffuse the ticking time bomb hanging over its head.
On Monday, red-hot $300 billion AI startup announced a new plan — one that sees the for-profit LLC restructure into a Public Benefit Corporation (PBC), and with the nonprofit parent taking a “big” financial stake and retaining legal control.
Importantly for the tens of billions of dollars OpenAI has raised over the years, OpenAI believes that the new proposal will meet the requirements placed upon it by investors that it restructure itself as a condition of funding, a person familiar with the matter told Business Insider.
OpenAI’s most recent funding round includes a complicated investment from SoftBank, the Japanese conglomerate that invested $20 billion earlier this year, with another up to $20 billion (part coming from a syndicate) becoming available in December if it restructured as a for-profit.
Similarly, OpenAI previously raised several billion from other investors last year, with a provision allowing investors to claw back funds if the company had not restructured within two years.
In its current formation, OpenAI is beholden to a nonprofit parent organization — an unconventional corporate structure that some investors have rankled at, and placed stipulations on their investments requiring it to be restructured within a specific timeframe.
OpenAI’s first attempt to resolve it by severing the link between the for-profit subsidiary and the nonprofit parent faltered in the face of scrutiny from everyone from state attorneys general to academics to Elon Musk.
If successful, the latest restructuring will provide clarity for investors and employees, also removing its convoluted “capped-profit” model that saw investor returns top out at a theoretical 100x. And it removes what had the potential to be a catastrophic hurdle for OpenAI — the withdrawal of huge tracts of funding — as it faces intense competition from Anthropic, Google, Musk’s xAI, and other rival AI firms.
“OpenAI was founded as a nonprofit, is today a nonprofit that oversees and controls the for-profit, and going forward will remain a nonprofit that oversees and controls the for-profit,” Sam Altman wrote in a letter to employees that the company also posted publicly. That will not change.”
‘The devil’s in the details’
Rose Chan Loui, a law professor and expert in nonprofit law at UCLA who has previously been critical of OpenAI’s plans, said she found the new proposal “encouraging.”
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“They’re saying all the right things,” she said. “They’re saying that the mission remains the same, that the PBC will have the same mission, and whether or not that really happens, I think depends on what processes they set up in terms of governance.”
She cautioned that there are still a number of unanswered questions, including the nature of how the nonprofit will legally control and practically monitor the public benefit corporation, the financial stake the nonprofit will hold, and the governance structure of the nonprofit. “I think the devil’s in the details, right?”
Robert Weissman, the co-president at Public Citizen, a public advocacy group, is less optimistic. Public Citizen has previously argued that OpenAI has already effectively surrendered its charitable mission in pursuit of for-profit goals and should be forced to convert to a for-profit entirely and compensate the charitable sector for its purported failures.
“In a lot of ways it’s saying: ‘we’re going to keep doing what we’ve been doing,'” he said. “And I think what they’ve been doing is unacceptable, and fails to uphold their nonprofit mission.”
OpenAI’s ongoing efforts to raise capital, he said, are indicative that the nonprofit “will not be exerting meaningful control over the now-public benefit corporation’s business.”
He added: “There has to be some demonstration of a fundamental reorientation by the nonprofit to actually exert control and direct the for-profit in some way that reflected its nonprofit values.”
The attorneys general have their say
OpenAI’s new structure is not a done deal.
The final decision on whether OpenAI goes ahead with it will be made by the attorneys general in California and Delaware, both of whom said they planned to review the new proposal. (In OpenAI’s blog post, board chair Bret Taylor wrote that “we made the decision for the nonprofit to retain control of OpenAI after hearing from civic leaders and engaging in constructive dialogue with the offices of the Attorney General of Delaware and the Attorney General of California.)
In a statement to BI, Delaware Attorney General Kathy Jennings said that she was “encouraged” by the Monday announcement, saying the company is “seeking to address” her concerns.
“Now that the Company has a new plan, I intend to review it for compliance with Delaware law by ensuring that it accords with OpenAI’s charitable purpose and that the non-profit entity retains appropriate control over the for-profit entity,” she said.
California Attorney General Rob Bonta was more terse in a statement to BI: “The California Department of Justice is reviewing the new proposed plan. This remains an ongoing matter — and we are in continued conversations with OpenAI.”