OpenAI's Restructuring Plans

By Aditya Soni and Arsheeya Bajwa
(Reuters) – OpenAI has announced intentions to revamp its corporate structure, proposing to establish a public benefit corporation (PBC) to facilitate capital acquisition and to eliminate restrictions imposed by its current nonprofit parent.

Proposed Changes

Under this new arrangement, OpenAI’s for-profit division will transition into a Delaware public benefit corporation (PBC), which aims to balance societal interests alongside shareholder value.

The nonprofit will retain a significant interest in the PBC through share ownership determined by independent financial advisers, as stated in a recent blog post by OpenAI. They claimed that this reorganization would position the nonprofit as one of the "best resourced nonprofits in history.”

OpenAI, founded in 2015 as a research-driven nonprofit, established a for-profit unit in 2019 to finance the high costs associated with AI development. The peculiar structure granted governance of the for-profit sector to the nonprofit, which gained attention last year when Sam Altman was fired and swiftly reinstated as CEO after employee protests.

Need for Investment

In light of escalating investments required for the ambitious goal of developing artificial general intelligence, OpenAI is seeking changes to attract more funding. Their latest funding round of $6.6 billion, valuing the company at $157 billion, is dependent on successfully restructuring and lifting the profit limitations for investors, according to reports.

“Investors are eager to support us, but at this level of capital, they require standard equity without bespoke structures,” the Microsoft-backed startup stated on Friday.
“The huge investments from major corporations into AI development highlight the resources required for OpenAI to fulfill its mission.”

The push to form a PBC aligns OpenAI with competitors like Anthropic and Elon Musk's xAI, which have obtained billions in funding using similar structures. Anthropic secured an additional $4 billion investment from Amazon last month, while xAI raised approximately $6 billion in equity financing in December.

Analysts’ Perspectives

DA Davidson & Co analyst Gil Luria emphasized that this restructuring is crucial for OpenAI's fundraising efforts, asserting that the operational and business control will reside with the for-profit division. While this step is significant, it does not necessarily imply a move towards launching an IPO.

Challenges Ahead

OpenAI may face challenges in executing this plan. Elon Musk, a co-founder of OpenAI who has since become a vocal critic, is seeking to halt the transition and has filed a lawsuit against OpenAI and Altman. Musk claims OpenAI has prioritized profits over its public good mission in advancing AI.

Earlier this month, OpenAI requested a federal court to dismiss Musk’s lawsuit and provided a range of communications with Musk, suggesting he originally supported the for-profit model before retracting his involvement due to not securing a majority equity stake.

Additionally, Meta Platforms is reportedly encouraging California’s attorney general to impede OpenAI’s transition to a for-profit entity, according to the Wall Street Journal.