OpenAI’s Quest to Transition to a For-Profit
What I’m sure you’ve been waiting for - another article about OpenAI! There has been a lot of news lately regarding OpenAI’s play to become a for-profit company. I’m going to break it down for you below.
1) A Brief History of the Legal Structure(s) of OpenAI
OpenAI was founded in December 2015 by a group of technology leaders, including Elon Musk, Sam Altman and Greg Brockman, with a mission to create safe, accessible artificial general intelligence (AGI) to benefit humanity as a whole. The organization was started as a non-profit, which aligned with its purpose to prevent the monopolization of advanced AI by ensuring its accessibility and transparency. With initial funding (i.e. donations) from influential tech figures (incl. $50mm from Musk), OpenAI embarked on groundbreaking research in machine learning, robotics, and natural language processing.
However, the cost of developing advanced AI models increased drastically over time, requiring significant computing power, talent, and data resources. OpenAI found that its non-profit status limited its ability to secure the substantial funding necessary for cutting-edge research, especially as it began competing with large, well-funded tech companies like Google, Microsoft, and Meta.
In response, OpenAI made a strategic shift in 2019 by establishing OpenAI LP, a for-profit arm structured as a “capped-profit” organization, controlled by OpenAI’s nonprofit board of directors. This unique model allows investors to earn returns capped at 100x their original investment, ensuring that profit incentives remain balanced with OpenAI’s mission to serve the public good. Microsoft invested $1 billion in this model, supporting the development of OpenAI’s prominent language models, including GPT-3 and GPT-4, and establishing a powerful cloud partnership.
Now, OpenAI is attempting to transition to a more conventional corporate for-profit structure, called a public benefit corporation (PBC) - which is the same legal structure as its competitor, Anthropic.
Your initial thought might be, WTF! How can someone start a charity, reap all the benefits of a nonprofit status, and then suddenly declare it as a for-profit? Well, you’re right - you can’t really do that. What will likely happen is an intense negotiation on the sale of OpenAI’s assets to the new for-profit PBC entity, which will result in the non-profit entity becoming a major shareholder in the new for-profit entity. I’d like to be a fly on the wall for that negotiation.
(Fun fact: Did you know that Mastercard was initially founded as a nonprofit? It now boasts a $47B Mastercard Foundation).
2) What Is a Public Benefit Corporation (PBC)?
You probably have seen more PBCs popping up lately as part of a greater shift towards balancing responsibilities to both shareholders and society at large. Some names of PBCs you may have heard of include Patagonia, Warby Parker, Allbirds and Ben & Jerry’s (some of my favorite companies!). A Public Benefit Corporation is a for-profit company that, unlike traditional corporations, has a legally defined purpose beyond maximizing shareholder value. PBCs are legally required to consider their impact on stakeholders and the general public in their decision-making processes, aligning them closely with socially conscious objectives. By transitioning to a PBC, OpenAI would add an additional layer of accountability and transparency to its commitment to developing AGI safely and ethically as a for-profit entity.
3) What Are the Implications of OpenAI Becoming a For-Profit Public Benefit Company?
Technically speaking, there would be three immediate changes: 1) it would no longer be controlled by its non-profit board (the same one that tried to oust Altman); 2) there would be no cap on profit returns (vs the 100x cap in place now); 3) Altman would own shares in the new for-profit entity. (Also, to note, the non-profit entity would continue to exist in some form.)
Whether this would be the right move in the long-term…only time will tell - but there are two sides to the debate now:
On one hand, developing powerful AI systems is expensive - like really expensive. OpenAI will likely have a loss of as much as $5B this year. As it considers raising from more investors, removing any restrictions on profits would be quite helpful.
Also, Altman has been the CEO of OpenAI for nine years, and currently has no ownership in the business. Investors typically like the CEO to have “skin in the game” to ensure mission-alignment. (Rumor is that he would be given a 7% equity stake in the business that could be worth $10B plus.)
On the flip side, there is significant concern over whether turning OpenAI into a for-profit entity would create too much friction around decisions that weigh financial outcomes and safety measures. This conflict of interest may drive company leaders and investors to prioritize financial returns over the long-term societal consequences of AI—which, ironically, of course, is what the OG OpenAI nonprofit was created to prevent in the first place. A PBC does have an additional layer of accountability as they are legally required to consider their impact on stakeholders and the general public in their decision-making processes, but that is in addition to new financial / shareholder considerations and interests.
To state the obvious, this potential structural change has a lot at stake but shouldn’t be a surprise development.