The $14 billion question dividing OpenAI and Microsoft
Summary
The two companies have hired investment banks to help negotiate how much equity Microsoft gets when OpenAI becomes a for-profit company.
OpenAI and Microsoft are facing off in a high-stakes negotiation over an unprecedented question: How should a nearly $14 billion investment in a nonprofit translate to equity in a for-profit company?
The startup behind ChatGPT is transitioning from a nonprofit organization to a for-profit corporation after it recently closed a funding round valuing it at $157 billion. Determining how to distribute equity when it becomes a for-profit is one of the biggest challenges it faces.
As OpenAI’s biggest investor by far, Microsoft could end up owning a large stake in what would be, by current measures, the second-most-valuable startup in the U.S. behind SpaceX.
In a sign of how significant the outcome will be for Microsoft and OpenAI, both have hired investment banks to advise them on the process. Microsoft is working with Morgan Stanley and OpenAI has tapped Goldman Sachs, according to people familiar with the matter.
In addition to figuring out how big a piece of the restructured artificial intelligence company Microsoft will own, the two sides must figure out what governance rights it will have.
It is unusual for nonprofits to convert to for-profit companies and particularly so for a company of OpenAI’s size and value.
Microsoft, other private investors and OpenAI employees currently own rights to future profits generated by a for-profit subsidiary controlled by OpenAI’s nonprofit board. Their returns are capped based in part on when they were issued these profit participation units.
Microsoft has invested $13.75 billion in OpenAI since 2019, including its share of the startup’s latest $6.6 billion fundraise. Its earlier investments were made when OpenAI was worth substantially less than it is today.
In addition to Goldman, OpenAI is being advised by Michael Klein, a former Citigroup banker with close ties to the startup’s chief executive, Sam Altman, the knowledgeable people said.
Another key question will be how much equity in the for-profit company will go to Altman, as well as to other employees.
Further complicating matters is the likelihood that the larger Microsoft’s stake is, the more scrutiny it could invite from antitrust regulators already taking numerous actions to try to tame the power of giant tech companies.
Microsoft and OpenAI have a complex relationship in which the two companies are closely tied both financially and technologically. Microsoft is OpenAI’s exclusive cloud provider and uses its technology for the Copilot AI application. At the same time, Microsoft has been growing its own AI capabilities and Altman has been looking for other sources of cloud computing power.
Investors in OpenAI’s latest round, which include Nvidia along with investment firms Thrive Capital and SoftBank, received debt that will convert to set amounts of equity when OpenAI becomes a for-profit company.
OpenAI plans to become a public-benefit corporation, meaning its mission is to generate social good along with profits and to operate in a sustainable manner. There will still be a nonprofit component to OpenAI that will own equity in the restructured company—another wrinkle in the already intricate negotiations with Microsoft.
OpenAI has two years to become a for-profit, or else investors in its latest round can ask to be paid back the money they provided.
Tom Dotan contributed to this article.
Write to Berber Jin at berber.jin@wsj.com and Corrie Driebusch at corrie.driebusch@wsj.com
