Who owns OpenAI? Blockbuster deals complicate investor payouts
Microsoft, OpenAI’s staff and non-profit arm are due close to 90% of start-up. But Nvidia deal will dilute shareholders
OpenAI’s recent blockbuster deals have added a new layer to its complicated ownership structure, leading to more uncertainty over when and how its powerful shareholders will get an eventual payout.
The start-up became the world’s most valuable private company this month, surging to a $500bn valuation on the back of a major share sale, in between striking multibillion-dollar deals with chipmakers Nvidia and AMD.
Those deals will help the lossmaking group realise its ambition to deploy $1tn in computing power over the next few years.
But OpenAI’s boundless capital requirements meant its backers — including Microsoft, SoftBank and Josh Kushner’s Thrive Capital — would see their shareholding diluted through further fundraising, said people familiar with the company’s plans.
Executives at the company believe demand for its tools far outstrips what it can supply given current computing power restraints, and that the outlay will quickly be recouped.
ChatGPT, with 800mn regular users and growing fast, will propel OpenAI from a non-profit into the next multitrillion-dollar company, ensuring its backers will secure historic returns on investment, they argue.
“Most people would prefer to have a smaller piece of a bigger pie,” said a senior OpenAI executive.
Critical to OpenAI’s vision are negotiations with its biggest backer, Microsoft, over its plans to move to a more conventional for-profit corporate structure.
The conversion is an essential step before taking the company public, the most likely route to a big payday for its backers.
Investors are currently entitled to a share of profits. If the change is successful, they will instead receive equity in OpenAI’s for-profit subsidiary.
Microsoft, an early backer that has provided more than $13bn in funding to date, would be the largest single shareholder with about 30 per cent, said people with knowledge of the ongoing negotiations.
Employees are expected to own close to 30 per cent, as would OpenAI’s non-profit parent group, which currently controls the overall group. At OpenAI’s valuation today, each of those stakes would be worth almost $150bn.
The non-profit will not have special shareholder rights in the new structure, according to a person with knowledge of the plans.
Instead, it will have the right to nominate directors for the for-profit subsidiary, a measure the company hopes will satisfy attorneys-general in California and Delaware who can stymie the conversion if they feel it undermines OpenAI’s charitable purpose.
Critics of the conversion say the measure is not sufficient to ensure the non-profit remains in control of the overall company.
The slice of remaining equity will be split between Japan’s SoftBank, which has committed to invest more than $30bn, venture capitalists including Khosla Ventures and Thrive Capital, and shareholders in Jony Ive’s hardware start-up io, which was acquired by OpenAI earlier this year.
OpenAI’s chief executive Sam Altman is also expected to receive a stake, though that would be negotiated only once the conversion has taken place, according to people with knowledge of the process. One of the people added there were no active conversations about Altman receiving equity.
Elon Musk, who gave OpenAI about $45mn after it was founded in 2015, would not receive equity as his contribution was a donation, they added. Musk is suing to block the conversion, arguing it betrays OpenAI’s founding mission.
The people added that the final figures were subject to a series of negotiations, between OpenAI and Microsoft, the attorneys-general and other investors.
Further complicating the picture are OpenAI’s recent deals with Nvidia. The chipmaker will invest as much as $100bn in $10bn increments over the coming years as OpenAI’s power demands increase, taking equity at the prevailing valuation.
Much of the capital required to fund OpenAI’s roughly $1tn data centre ambitions will be raised as debt, or be paid for out of future revenues, according to executives at the company.
Nonetheless, any post-conversion fundraising will dilute existing shareholders, who will also see the size of their stakes eroded as OpenAI hands out stock to new staff hires.
The company has about 3,000 employees, having roughly quadrupled in two years, and is in a heated competition for talent with rivals including Meta.
OpenAI’s scale and funding requirements are unique for a private company. The group has raised about $60bn to date and its valuation would put it among the 20 most valuable listed companies in the world. By comparison, Apple, Microsoft and Nvidia had only raised millions of dollars and went public before their valuations exceeded $2bn.
OpenAI, which will not be able to carry out an initial public offering until it has converted, has had no issue raising money from private sources, who are persuaded by the company’s rapid growth and the scale of the opportunity.
The company could stop burning cash on research and new data centres and aim to break even, said the senior OpenAI executive.
“However, if in five years [OpenAI is] still tripling business, we should absolutely not go for break even. We should go for more investment [because] the market cap should be so much bigger that the dilution shouldn’t matter.”