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compiled | xu yu

editor | xin yuan

according to a report from the wall street journal on september 29, openai, a large american ai model unicorn, may complete the transformation from a non-profit to a for-profit nature within a two-year deadline. after the transformation is completed, openai will be composed of a public interest non-profit company and a for-profit organization.

the transformation plan is part of openai’s new round of financing negotiations. the company expects to raise $6.5 billion, pushing its valuation to $150 billion. if the company fails to transform, its investors may withdraw their funds.

to this end, openai must meet the regulatory requirements of at least two states in the united states. it needs to decide how to allocate equity in a for-profit company and how to divide the assets of a nonprofit entity without violating regulations.

karen blackistone, general counsel at u.s. venture capital firm hangar management llc and a lawyer specializing in technology and tax-exempt organizations, said: “this type of transaction is very complex to implement and the companies involved need to overcome it. plenty of legal and regulatory hurdles.”

1. nine years after its establishment, openai has built a"matryoshka"organizational structure

founded in 2015, openai is a non-profit organization dedicated to safely developing artificial intelligence (ai). four years later, it established a separate for-profit subsidiary to raise more capital.

the subsidiary is currently governed by the board of directors of the aforementioned non-profit organization. if the for-profit subsidiary takes actions that are inconsistent with openai's humanitarian mission, the openai board of directors has the right to veto the proposal of the subsidiary's shareholders.

in its tax filings, openai notes that each branch of its organizational structure has legal obligations to follow its non-profit mission. for example, in the process of ai research and deployment, each subject in the branch cannot only consider economic interests, but must adhere to the principle of giving priority to ai security and public interests.

openai has revealed that it will continue to operate a non-profit organization engaged in charitable work and hold some equity in its for-profit company in some way.

2. shareholders are dissatisfied with the complicated organizational structure, and transformation has become a turning point for large-scale financing.

last fall, openai ceo sam altman was suddenly fired from the openai board of directors, only to be reinstated to his original position a few days later.

although the storm was short-lived, after experiencing this incident, openai's shareholders are worried that the current complex organizational structure may trigger similar turmoil again. as a result, they began to push openai to transform into a more typical corporate structure.

strictly speaking, investors in openai at this stage do not actually get equity in the company. what they actually hold is a share of the company's future profits. and the company is currently losing billions of dollars every year.

once openai adopts a clearer ownership structure, its shareholders can avoid the profit cap originally set by the company's non-profit status.

to date, microsoft has injected a total of $13 billion into openai's for-profit unit, becoming the company's largest external shareholder. other investors bought shares in the company through employee share buybacks.

if openai eventually becomes a for-profit company that is no longer managed by a non-profit organization, its investors can enjoy openai's dividends more simply and directly.

the developer of chatgpt is currently raising $6.5 billion in funding, with investors including technology giants such as microsoft and nvidia, several venture capital firms and a uae government holding company. if it wants to successfully advance this round of financing negotiations, openai needs to meet a key clause related to the nature of the organization.

the terms require openai to separate from its current non-profit charity within two years and become a public-benefit company.

this also means that the company's mission will undergo a fundamental change. in the future, it will not only create profits, but also take into account social benefits.

3. openai’s transformation faces dual local regulations and supervision, and also involves antitrust review

openai's original intention to transform into a for-profit company is to simplify its organizational structure, but the process of achieving this goal will be very complicated. its place of registration is delaware, usa, so it needs to change its organizational structure in accordance with local laws and regulations.

jill horwitz is a law professor at the university of california, los angeles, and founder and director of the school's lowell milken center for philanthropy and nonprofits. she believes that, given that delaware’s business laws and regulations are relatively loose, submitting an application to the government may be the easiest step in openai’s process of changing its organizational structure.

in her view, how openai allocates its asset allocation will be relatively more complicated. this is because the existing assets of a non-profit organization cannot be directly transferred intact to a for-profit company.

the law requires nonprofits to retain assets, including cash and securities, equal to the value they transfer to for-profit companies. in other words, openai's operating business may eventually be sold to the for-profit company or investors, while the original charity will retain the proceeds.

alexander reid, a partner at the american law firm bakerhostetler, said: "relevant assets that have been contributed to the public interest in advance cannot be directly converted into private interests without compensating the public for losses."

it's unclear how much the nonprofit openai plans to retain will stand to gain from the deal to transform the company. referring to the post-money valuation of openai’s new round of financing, this figure is expected to reach us$150 billion. then, openai’s non-profit organization may receive huge profits.

at the same time, because the non-profit organization may own some of openai’s ai technology patents, the company will also need to account for the value of these patents in the transformation transaction. this makes the entire valuation process more complex.

in addition, according to multiple legal experts, openai’s operations are concentrated in california, so the local attorney general also has the right to refuse the transfer of these charitable assets.

4. share dividends, musk’s prosecution, ai technology patents, openai’s transformation faces many variables

openai's board of directors is considering letting altman take a stake in a new for-profit company, and the shareholding ratio will be made public.

openai still needs to find a solution to the problem of how to convert the profit share of microsoft and other existing investors into equity proportions in the reorganized company.

microsoft has claimed that its investment in openai was only in exchange for a share of the company's potential profits. regulators have scrutinized microsoft's relationship with openai, including whether it actually controls the ai ​​startup.

however, as the largest external shareholder of openai, microsoft may obtain a larger stake after the company adjusts its ownership structure. this may trigger antitrust scrutiny from relevant regulatory agencies.

at the same time, openai also needs to decide whether the for-profit company will be managed by a nonprofit board of directors, and who will manage the remaining nonprofit.

it is worth noting that before completing the transformation, openai still needs to define what rights its non-profit organization can have in the ai ​​technology developed by new for-profit companies.

in addition, openai still has to deal with the lawsuit from its former co-founder musk. the company was accused of deceiving musk into taking shares and participating in a seed round of financing on the grounds that it had always adhered to its non-profit nature.

in 2018, musk parted ways with ceo altman and other openai co-founders. part of the reason for his departure was that other senior executives wanted to bring in outside investment and commercialize ai technology, which went against the original intention of openai.

so the next year, he founded xai, now a large american model unicorn, to benchmark openai.

in august this year, musk revised the lawsuit and re-sued. openai denied musk’s relevant statements and accusations.

conclusion: proceeds from for-profit companies may be used for non-profit charitable work

so far, openai has not disclosed what responsibilities the remaining non-profit organization will have once the for-profit company takes over all operations.

openai’s official website shows that at this stage, its non-profit organization has sponsored some research on universal basic income plans and provided charitable funding for projects focusing on technology research and development and social equality.

the organization may continue such charitable work in the future and use proceeds from its shares in for-profit companies as charitable funds.