OpenAI ditches plan to convert to for-profit business

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OpenAI is abandoning plans to turn itself into a for-profit company, keeping the maker of ChatGPT under the control of a non-profit board after intense criticism from Elon Musk.

The artificial intelligence company has been at the centre of a battle over its future that has pitted chief executive Sam Altman against co-founder and tech entrepreneur Musk as well as former employees and AI academics.

OpenAI, which recently raised funds at a $260bn valuation, had argued it needed a simplified corporate structure to unlock greater investment. But critics said unless the group’s non-profit board retained control, it would not comply with its founding mission: to ensure AI benefits humanity.

OpenAI on Monday said it would instead change the status of its for-profit subsidiary. That will mean investors in the company, which include Microsoft, and employees will own conventional equity stakes rather than an entitlement to a share of profits, while leaving the non-profit with ultimate control.

The non-profit will also receive a large stake in the for-profit unit, which will become a public benefit company — a structure that focuses on social good in addition to profits.

Musk, who left OpenAI in 2018, has attempted to block its conversion to a for-profit business. He filed a lawsuit in California alleging that OpenAI and Altman had breached the terms of his contract and were engaging in fraud by converting the company to a for-profit.

Musk has also lobbied for OpenAI to hold a public auction for the non-profit’s assets and lodged a $97.4bn bid to take control of the group.

“This changes nothing,” said Marc Toberoff, Musk’s lead counsel in the pending litigation, in a statement following OpenAI’s announcement.

The announcement “fails to address the core issues: charitable assets have been and still will be transferred for the benefit of private persons, including Altman, his investors and Microsoft”, he added.

Altman said on Monday that the decision to keep the non-profit in control was not motivated by outside pressure. “We’re all obsessed with our mission. You’re all obsessed with Elon.”

OpenAI also faces complex negotiations with the attorneys-general of Delaware, where the non-profit is incorporated, and California, where it is has its headquarters, and with its investors, including Microsoft.

The attorneys-general have sought assurances from OpenAI that it will remain committed to its charitable purposes as part of any conversion, and that the assets held by the non-profit will be fairly valued in the restructuring.

Delaware’s attorney-general Kathy Jennings said on Monday that her “foremost concern” had been to ensure OpenAI’s ultimate beneficiary would remain the public. She said she was encouraged that the company was seeking to address the issue.

Altman said on Monday that OpenAI needed “much more capital than we envisaged” when the company was founded as a research lab a decade ago.

OpenAI launched its for-profit subsidiary in 2019, which opened the door for external investors to back the company in exchange for a share of profits. After the launch of ChatGPT in 2022 kicked off a race to develop new AI tools, the company has sought to raise tens of billions of dollars to remain competitive with rivals such as Google, Anthropic and Musk’s xAI. 

The previous structure did not allow investors to take equity stakes in the for-profit unit, something typically demanded by backers of tech companies.

OpenAI’s past two rounds of financing — a $6.6bn investment in October and a $40bn SoftBank-led round this year — have both contained provisions attached to the company converting to a more traditional structure.

Should OpenAI convert successfully, investors in both rounds will receive equity in the public benefit corporation in proportion to the cash they have put up.

Any delay or derailment of the process, however, gives them the right to claw back cash or, in SoftBank’s case, cut its commitment to the company by $10bn unless the process is completed this year.

OpenAI is still negotiating with Microsoft over the size of the stake the US tech group will take in the public benefit corporation, and is working with independent advisers and the attorneys-general on what stake the non-profit will own, according to a person close to OpenAI.

Nonetheless, they added, the company was confident it could now complete the transition this year.