OpenAI launched a for-profit subsidiary a year later in order to raise outside capital, including more than $13 billion (NZ$23b) so far from its biggest backer, Microsoft. However, the non-profit entity, along with employees and investors, currently owns that for-profit subsidiary.
OpenAI is attempting to become a public benefit corporation, a type of for-profit entity committed to bettering society. The company has suggested that the non-profit’s “significant interest” in the existing for-profit would take the form of shares in the PBC at a fair valuation, which it says will be determined by independent financial advisers.
The PBC would run and control OpenAI’s operations and business, while the non-profit would “pursue charitable initiatives in sectors such as healthcare, education and science”, the company wrote in a December blog post.
In his letter, Musk’s lawyer pushed the attorneys-general to allow outside investors to bid for the non-profit’s stake in OpenAI. If successful, that could allow an outside investor to take a significant position in, and to exercise control over, the start-up.
The proposed conversion to a PBC would also mean the non-profit entity will relinquish governance over OpenAI’s business and operations. One person familiar with the situation said those powers could themselves be worth billions of dollars.
In the letter, Toberoff suggested an auction was the only way to ensure the non-profit receives maximum value for its assets and upholds its fiduciary duties.
The non-profit’s stake in the public benefit corporation was likely to be worth tens of billions of dollars, according to a person with knowledge of the matter.
The Tesla chief and confidant of US president-elect Donald Trump has previously accused Altman of “deceit of Shakespearean proportions”, alleging that OpenAI and Microsoft have departed from the start-up’s original mission.
OpenAI said in December that its conversion into a PBC would “result in one of the best resourced non-profits in history” and multiply the donations given by early backers — including Musk — “manyfold”.
Its complex corporate governance came under scrutiny when Altman was briefly ousted by the non-profit board in November 2023, and the company has since been weighing more conventional arrangements.
Musk, who founded his own AI start-up xAI in 2023, has recently stepped up efforts to derail OpenAI’s conversion.
In November, he sought to block the process with a request for a preliminary injunction filed in California. Meta has also thrown its weight behind the suit, which is the fourth Musk has launched against OpenAI.
In legal filings from November, Musk’s team wrote: “OpenAI and Microsoft together exploiting Musk’s donations so they can build a for-profit monopoly, one now specifically targeting xAI, is just too much.”
Kathleen Jennings, attorney-general in Delaware — where OpenAI is incorporated — has since said her office was responsible for ensuring that OpenAI’s conversion was in the public interest, and determining whether the transaction was at a fair price.
Members of Musk’s camp — wary of Delaware authorities after a state judge rejected a proposed $56b pay package for the Tesla boss last month — read that as a rebuke of his efforts to block the conversion, and worry it will be rushed through. They have also argued OpenAI’s PBC conversion should happen in California, where the company has its headquarters.
In a legal filing last week Musk’s attorneys said Delaware’s handling of the matter “does not inspire confidence”.
OpenAI committed to become a public benefit corporation within two years as part of a $6.6b funding round in October, which gave it a valuation of $157b. If it fails to do so, investors would be able to claw back their money.
There are a number of issues OpenAI is yet to resolve, including negotiating the value of Microsoft’s investment in the PBC. A conversion was not imminent and would be likely to take months, according to the person with knowledge of the company’s thinking.
OpenAI declined to comment. The California and Delaware attorneys-general did not immediately respond to a request for comment.
Written by: George Hammond in San Francisco
© Financial Times
