openai secures microsoft’s blessing to transition its for-profit arm

OpenAI and Microsoft Reach Agreement on Partnership Restructuring

OpenAI and Microsoft have announced a preliminary, nonbinding agreement regarding a revised partnership structure. This arrangement would facilitate the conversion of OpenAI’s for-profit division into a public benefit corporation (PBC).

Potential for Increased Investment and Public Offering

Should state regulators approve the proposed transition, OpenAI would gain the ability to attract further investment. Ultimately, this could pave the way for the company to become a publicly traded entity.

Nonprofit Control to be Maintained

According to OpenAI board chairman Bret Taylor, the nonprofit organization that currently governs OpenAI will continue to operate and maintain oversight of the company’s activities under the terms of the agreement.

The nonprofit would secure a significant equity stake in the newly formed PBC, valued at over $100 billion, as detailed by Taylor. Specific details beyond this valuation have not been publicly disclosed.

Memorandum of Understanding Details

A joint statement from Microsoft and OpenAI confirmed the signing of a nonbinding memorandum of understanding (MOU). MOUs outline the expectations and intentions of each party involved, though they are not legally enforceable.

The companies indicated they are actively working to finalize the definitive contractual terms of the agreement.

Resolution of Prior Negotiations

This development appears to conclude several months of discussions between OpenAI and Microsoft concerning the company’s future transition plans. OpenAI’s unique governance structure, with a nonprofit board in control, previously led to the temporary removal of CEO Sam Altman in 2023.

Altman was subsequently reinstated, and a number of board members resigned, but the fundamental governance model remains unchanged.

Current Partnership and Evolving Dynamics

Currently, Microsoft benefits from prioritized access to OpenAI’s technology and serves as the primary provider of cloud services for the startup. However, the substantial growth of ChatGPT since Microsoft’s initial investment in 2019 has prompted OpenAI to seek adjustments to the existing cloud service arrangement.

Diversification of Cloud Providers

Over the past year, OpenAI has actively pursued agreements to reduce its reliance on Microsoft’s cloud infrastructure. A recent contract with Oracle commits OpenAI to spending $300 billion on cloud services over a five-year period beginning in 2027.

Furthermore, OpenAI has established a partnership with the Japanese conglomerate SoftBank for its Stargate data center initiative.

Regulatory Approval Required

Taylor emphasized that OpenAI and Microsoft will continue to collaborate with the attorneys general of California and Delaware throughout the transition process. This indicates that regulatory approval is still necessary before the agreement can be implemented.

Requests for comment from the California and Delaware attorneys general were not immediately answered.

Past Disputes Over Technology Ownership

Reportedly, negotiations between OpenAI and Microsoft experienced periods of tension. The Wall Street Journal reported that Microsoft sought control over technology belonging to Windsurf, an AI coding startup OpenAI had considered acquiring.

OpenAI resisted relinquishing control of Windsurf’s intellectual property. Ultimately, the acquisition did not proceed, and Windsurf’s founders joined Google, while the remaining team was acquired by Cognition.

Impact on Elon Musk’s Lawsuit

The proposed transition is a central point of contention in Elon Musk’s lawsuit against OpenAI, which alleges that Sam Altman, Greg Brockman, and the company have deviated from their original nonprofit mission. Musk’s legal team has sought information related to the Microsoft-OpenAI negotiations.

Musk previously made an unsolicited $97 billion offer to acquire OpenAI, which was rejected by the board. However, experts suggested this bid may have increased the value of the nonprofit’s stake.

Nonprofit Stake Value

Significantly, the value of the nonprofit’s stake in OpenAI PBC, as outlined in the current agreement, exceeds Musk’s previous offer.

Concerns from Other Nonprofits

Organizations like Encode and The Midas Project have voiced concerns about OpenAI’s shift towards a for-profit model, arguing it jeopardizes the company’s commitment to developing artificial general intelligence (AGI) for the benefit of humanity.

OpenAI responded by issuing subpoenas to these groups, alleging they are funded by competitors, specifically Elon Musk and Meta CEO Mark Zuckerberg. Encode and The Midas Project have denied these allegations.