OpenAI Completed Restructuring, Freeing It to Go Public, Make Deals With New Partners

OpenAI completed its transition from nonprofit to for-profit in a feat of legal engineering that took an army of lawyers, investment bankers, and two state attorneys general 18 months to negotiate.

What’s new: The restructured OpenAI Group PBC is a public benefit corporation, a for-profit company with a mission to create a positive social impact. It can earn unlimited returns to its investors, which clears the way to attract further investments including a possible initial public offering. It remains overseen by a nonprofit foundation, the newly renamed Open AI Foundation, which owns a 26 percent stake in the corporation. Microsoft holds a 27 percent stake in OpenAI under new terms for the companies’ partnership.

How it works: The agreement frees OpenAI from the constraints of its 2015 nonprofit beginnings that have limited investors to a 100x maximum return since an earlier restructuring in 2019. The new structure aims to satisfy the concerns of state officials in California and Delaware that the old structure created conflicts of interest between serving the public and rewarding shareholders, even as it aims to preserve the company’s mission to ensure that artificial general intelligence (AGI), if and when OpenAI builds it, will benefit humanity.

As a public benefit corporation, OpenAI must balance revenue and growth with providing social good. Among AI companies, Anthropic and GrokAI also are PBCs.
OpenAI’s structure remains unusual in that a nonprofit organization is still in charge technically. OpenAI Foundation has the power to appoint and remove the corporation’s board members, and its directors sit on the for-profit’s board. Its safety-and-security committee can halt releases of new models.
OpenAI’s nonprofit, whose stake in the company is worth $130 billion, is the wealthiest foundation in the U.S. For comparison, the Gates Foundation holds $86 billion. It committed an initial $25 billion to improving healthcare and fortifying AI guardrails.
Microsoft will have rights to use OpenAI’s models until 2032, including models built after the companies agree that OpenAI has built an AGI. Microsoft will continue to receive 20 percent of OpenAI’s revenue and have an exclusive right to use its APIs, but it no longer has a right of first refusal on new cloud business, according to Bloomberg. The revenue-sharing and API agreements will remain in effect until an independent panel verifies that OpenAI has achieved AGI.

Behind the news: This isn’t the restructuring OpenAI originally wanted. A 2024 plan would have eliminated the nonprofit and turned the company into a traditional venture-backed entity. The California and Delaware attorneys general balked at that proposal, which led to a compromise that keeps the nonprofit in charge.

OpenAI needed California’s and Delaware’s approvals to avoid losing a $40 billion investment from SoftBank, half of which was contingent on the restructuring and lifting of the cap on investor returns. It also needed Microsoft’s agreement. This gave Microsoft significant leverage over the terms.
OpenAI committed to remaining in California, and thus to continue to be subject to the state’s oversight, as part of its negotiation with California’s attorney general.

Why it matters: OpenAI has achieved staggering growth in its user base and valuation in spite of its nonprofit status. The new restructure adds pressure to get on a road to profitability. The company’s annual revenue run rate reportedly is greater than $13 billion, but given its commitment to spend an estimated $1 trillion on computing infrastructure, further funding is necessary to finance its ambitions.

We’re thinking: Microsoft’s early investments in OpenAI have more than paid off. When Microsoft CEO Satya Nadella proposed his company’s initial $1 billion investment in 2019, Bill Gates warned, “You’re going to burn this billion dollars.” Microsoft’s total investment of $13 billion is now worth $135 billion.