OpenAI negotiates position in for-profit model with investor Microsoft

It is an unusual step: OpenAI wants to transform itself from a non-profit organization into a for-profit organization – This raises a crucial question for Microsoft, the largest donor: How will the investor be positioned in the for-profit scenario – compared to the 14 billion dollars OpenAI has already received from the company as a non-profit organization?

The startup, which launched ChatGPT, received 6.6 billion dollars from investors in the form of a convertible bond in its last financing round at the end of September, which corresponds to a valuation of 157 billion dollars for the entire company. Just under one billion came from Microsoft.

Investment banks to advise

The new money from investors is linked to the condition that OpenAI gives up its non-profit status. Previously, donors could only receive a certain return, with the surplus automatically going to the non-profit organization. The new structure would no longer limit how much donors could earn from their investment. This also raises the question of how much OpenAI will give to its largest investor, Microsoft, in the future. Both parties have consulted an investment bank.

Microsoft is being advised by Morgan Stanley, OpenAI by Goldman Sachs, according to a report in the Wall Street Journal. In addition to the question of how much Microsoft should own of OpenAI in the future, Microsoft's future rights to have a say in company management issues also play a role.

Complicated negotiations

OpenAI donors and employees currently still receive a certain share of the profits of a for-profit subsidiary of OpenAI, which is controlled by the management of the non-profit umbrella company. The respective share is based on a scheme that is divided into profit tranches. For example, only the first OpenAI investors, including Khosla Ventures and LinkedIn co-founder Reid Hoffman, are entitled to the first 194 million dollars in profit distribution. Microsoft is then entitled to 75 percent of the next 17.3 billion dollars in profit distribution, with the remainder divided between the OpenAI workforce and the first investors. The Wall Street Journal has broken down the exact scheme with the help of company documents. This clearly shows how many parties and their claims need to be transferred to the new model.

The interdependencies between OpenAI and Microsoft do not make the negotiations any easier. For example, Microsoft provides the cloud servers for the computationally intensive OpenAI applications, while OpenAI's technology is already an integral part of Microsoft Copilot. How OpenAI and Microsoft ultimately reach an agreement will also have a significant impact on the expectations of the other financial backers regarding their position in the for-profit scenario. The start-up now has two years to complete the change – otherwise the bond subscribers can demand their money back or try to negotiate a larger share package.

(nen)