Microsoft talks set to push OpenAI’s restructure into next year
Software giant wants to retain access to start-up’s technology while removing artificial general intelligence’ clause
OpenAI’s corporate restructuring is likely to slip into next year, as the ChatGPT maker negotiates over key terms of its future relationship with Microsoft, complicating plans to raise billions of dollars more in funding.
The $300bn artificial intelligence start-up has been locked in complex discussions with the software giant, its biggest backer, to rewrite an existing commercial contract between the companies that runs until 2030.
A deal would allow OpenAI to complete plans for a restructure which would allow investors to hold equity in the business and unlock a future initial public offering. But multiple people with knowledge of the talks said there is still distance between the two sides on key issues that could push negotiations beyond December 31.
Failure to reach an agreement by that date would allow SoftBank to withhold its $10bn commitment to the company, according to the terms of the Japanese group’s investment. It could also hamper OpenAI’s efforts to raise more capital.
There are several outstanding points to resolve with Microsoft, according to multiple people close to both companies.
The first is Microsoft’s access to OpenAI’s “application programming interface” or API. Microsoft has exclusive rights to host OpenAI’s models on its Azure cloud service, making it a critical gatekeeper to the technology.
OpenAI is pushing for additional partnerships with Google and Amazon Web Services, an arrangement similar to rival Anthropic, according to people with knowledge of the talks. That would boost the start-up’s API sales revenues, which currently account for roughly a quarter of current annual recurring revenue of $12bn.
While Microsoft has little incentive to cede access to rival cloud providers, the two companies are negotiating a narrow agreement which would enable OpenAI to only serve government customers that are not on Azure, according to one of the people.
Second, the companies are wrangling over Microsoft’s future access to OpenAI’s intellectual property, and whether the software giant will see how future models are trained or merely be able to use them in its products, according to the people.
A related point of contention is a so-called AGI clause written into the contract. This empowers OpenAI to cut Microsoft’s IP access if and when the company achieves “artificial general intelligence”, defined as “a highly autonomous system that outperforms humans at most economically valuable work”.
Microsoft chief Satya Nadella wants to do away with the clause entirely, according to people familiar with the negotiations. But OpenAI is pushing to retain it in some form, as it provides the company with powerful leverage over the tech giant.
“OpenAI having the AGI clause is negotiating chit,” said one person with direct knowledge of the negotiations. “It’s a threat, but it’s more like mutually assured destruction because if it doesn’t go by year-end, they won’t be able to raise any money again and Sam [Altman] knows that.”
Resolution of those issues will inform what percentage of OpenAI’s equity Microsoft ultimately receives following OpenAI’s restructuring.
The Big Tech company is expected to hold between 30-35 per cent of OpenAI, in which it has invested more than $13bn to date, but that figure could change, according to the people with knowledge of the talks.
A deal remains the likeliest outcome, they added, but negotiations are likely to drag to the end of year fundraising deadline or beyond.
In a joint statement, OpenAI and Microsoft said: “We have a long-term, productive partnership that has delivered amazing AI tools for everyone. Talks are ongoing and we are optimistic we will continue to build together for years to come.”
Other hurdles must also be cleared before the company can restructure. Even with a swifter resolution of its contract with Microsoft, discussions with other shareholders and the attorneys-general in California and Delaware — where OpenAI operates and is incorporated — could well extend into next year, these people added.
Discussions are being led by the two companies’ chief financial officers, OpenAI’s Sarah Friar and Microsoft’s Amy Hood, according to those with knowledge of the talks. A deal would allow OpenAI’s investors to hold equity in the business, rather than the profit sharing arrangement which exists today.
OpenAI’s last two funding rounds — one last October at a $157bn valuation and another launched in March and led by SoftBank at a $300bn valuation — included terms which would allow its backers to claw back or withhold some of their investment if the start-up fails to convert within a set timeframe. For SoftBank, that deadline is the end of 2025.
OpenAI executives are confident the Japanese group will not withdraw investment if talks stall and believe they can continue raising capital even with their existing structure, thanks to the company’s rapid growth since SoftBank initially committed to lead a $40bn funding round in March.
OpenAI is currently talking to investors about a secondary share sale which would value it at $500bn, which would in effect mark up SoftBank’s investment by two-thirds. It has also received interest from investors willing to invest in a “primary” fundraising at an even higher valuation, according to people familiar with the matter.
Despite the lack of clarity about OpenAI’s future, the company’s $8.3bn March funding round earlier this month — which formed one tranche of the SoftBank-led round — was many times oversubscribed, according to people with knowledge of the matter.