How SoftBank’s OpenAI Bet Could Benefit CEO Son
A little-noticed disclosure in SoftBank’s earnings report released Thursday said that Son no longer was on the hook for the roughly $1 billion personal guarantee he had pledged so a SoftBank-managed investment fund could invest tens of billions in OpenAI. But he retains a longstanding arrangement that enriches him personally if the investment fund does really well—which the OpenAI investment makes much more likely.
Son’s arrangement gets lost sometimes amid the questionable corporate governance practices that have become common across the AI race—but it’s a doozy. It essentially gives him the opportunity to make billions of dollars personally, disproportionate to other SoftBank shareholders, if OpenAI goes public and trades up into the trillions of dollars in market cap.
Here’s how it works: SoftBank has invested an enormous sum, $34.6 billion, in OpenAI, which translates into an 11% stake in the creator of ChatGPT. But the investment isn’t parked directly on SoftBank’s balance sheet. Instead, it sits entirely in the 2019 investment fund known as Vision Fund 2. The fund borrowed $8.5 billion from its parent, SoftBank, to make some of the investment, with Son putting up a personal guarantee as well to support the loan.
He had good reason to make the guarantee. A previously disclosed arrangement gave Son the right to earn 17.25% of the profits in Vision Fund 2, once its realized and unrealized value exceeds the cost of investment by 30%.
Until recently, Son’s hopes of cashing in weren’t looking good. You might remember the fund made hundreds of bad bets on startups. As of a year ago, before its OpenAI investing streak, Vision Fund 2 had lost $23 billion, or 40% of the money it had invested. Much of the SoftBank investing team in Silicon Valley and beyond, meanwhile, had been dismantled.
It’s a rosier story now—and more concentrated. Thanks largely to Son’s bet on OpenAI, the fund is nearly in the black, down only about 3%, after a $19.8 billion gain for its OpenAI stake, SoftBank said this week. It will be able to book an even larger gain if OpenAI raises additional tens of billions at a $750 billion valuation.
All of this has been great for SoftBank’s stock price, which has doubled over the past year and which served as a publicly traded proxy for OpenAI sentiment. But the man who could get an outsize benefit is Son himself, thanks to his right to a share of Vision Fund 2 profits. To be sure, the fund is still a ways off from generating the return he needs to earn his payout.
In the meantime, Son no longer appears to risk much of the downside, even if OpenAI’s “rough vibes” return. SoftBank said Wednesday its loan to Vision Fund 2 had been repaid and converted to preferred equity. SoftBank itself gets profits first if the Vision Fund 2 is a modest success, but it still holds a lot of risky investments, of course. And it is relying heavily on debt to fund its AI funding commitments.
AI may have figured out software engineering, but Masa remains the master of financial engineering.