OpenAI has abandoned its controversial restructuring plan. In a dramatic reversal, the company said Monday it would no longer try to separate control of its for-profit arm from the non-profit board that currently oversees operations. “We made the decision for the nonprofit to retain control of OpenAI after hearing from civic leaders and engaging in constructive dialogue with the offices of the Attorney General of Delaware and the Attorney General of California,” said Bret Taylor, the chairman of OpenAI.
OpenAI had originally argued its existing structure would not allow its nonprofit to “easily do more than control the for-profit.” It also said it needed more money, a mere two months after securing $6.6 billion in new investment. “We once again need to raise more capital than we’d imagined,” the company wrote in December. “Investors want to back us but, at this scale of capital, need conventional equity and less structural bespokeness.”
OpenAI’s previous plan called for the nonprofit to cede absolute control of the for-profit, in return for whatever degree of control came with the amount of stock it was granted through the reorganization process.
This was the controversial part of OpenAI’s plan, with many, including former employees, labor and nonprofit groups and even Elon Musk, voicing opposition to the proposal. Now, the company says its nonprofit will retain control and become a “big shareholder in the PBC.”
“How is the nonprofit going to maintain control? How will that purpose be advanced?” asks Jill Horwitz, a visiting professor of law at Northwestern University. “We know from the press that OpenAI plans to appoint all the board members of the operating entity. Will that happen forever? Who will they be? Will it be self-perpetuating? Will the for-profit investors have a say in who those board members are?”
Put another way, OpenAI hasn’t said the exact structure that it intends to implement. According to Professor Michael Dorff, executive director of the Lowell Milken Institute for Business Law and Policy at UCLA, the company could adopt one of a few different options.
“If you had one class of stock, one vote per share, they would elect a board. You could just give the nonprofit the majority of the shares, and then they would then elect a majority of the board. They would therefore be in charge, at least for a while,” he says.
“More stable governance arrangements could be done by having dual class shares, where the nonprofit would have a class of stock and they would be the only owners of that class of the stock that is either super voting shares, again, giving it a majority, or even better, you can define a class of stock and say it has the right to elect a majority of the board.”
In short, the company hasn’t said how it plans to ensure its nonprofit maintains control. The nonprofit may have a “big” stake to start, but there are a few different ways that stake could be diluted. Even if you set aside the idea of an IPO for now, the company could still issue new shares or carry out a stock split. In those scenarios, if OpenAI’s non-profit doesn’t own special shares, its control of the company would be weakened.
According to Bloomberg, Microsoft has yet to sign off on OpenAI’s proposal. The company has invested nearly $14 billion into OpenAI. Under the terms of its October funding round, OpenAI had two years to transform itself into a for-profit business. If it failed to do so, the $6.6 billion it secured would turn into debt. We don’t know for sure, but the question of control is likely front and center in the negotiations between Microsoft and OpenAI, with the company’s financial future at stake. Complicating matters is that whatever arrangement the two come to, it needs to be rubber stamped by the state attorneys general of California and Delaware.
“We look forward to advancing the details of this plan in continued conversation with [the state AGs], Microsoft, and our newly appointed nonprofit commissioners,” Altman wrote in his letter.
Parts of OpenAI’s previous plan remain unchanged. As before, the company will reorganize its for-profit subsidiary into a public benefit corporation. In doing so, OpenAI still plans to eliminate the current capped profit structure that limits investor returns to 100x, with excess profits reserved for the nonprofit. OpenAI has yet to record a profit; as of last year, the company recorded around $5 billion in losses.
“This is not a sale, but a change of structure to something simpler,” wrote OpenAI CEO Sam Altman in a letter to employees shared by the company. “Instead of our current complex capped-profit structure—which made sense when it looked like there might be one dominant AGI effort but doesn’t in a world of many great AGI companies—we are moving to a normal capital structure where everyone has stock.”
This story originally appeared on Engadget
