TheChek News Flow

Aplanned sale of OpenAI employee shares that would value the startup at about $86 billion on paper hangs in the balance after the sudden firing of CEO Sam Altman and a slew of top executive departures. The tender offer, which Thrive Capital is leading, has not yet closed but has been in its final stages and was expected to be completed as soon as next month, according to a person familiar with the matter.

By Saturday, three former OpenAI employees who were planning to participate in the tender said they no longer expected the sale to happen, or if it did, that it would come with a lesser valuation because of the recent turn of events. Greg Brockman, the president and technical leader who played a key role in developing the company’s blockbuster ChatGPT product, resigned hours after Altman’s firing, followed by three more senior researchers.

• Thrive agreed to lead $86 billion-valuation tender prior to Altman’s firing

• Some OpenAI shareholders doubt tender will happen

• Venture capitalists are showing their support for Altman

The departures instilled fear in some investors that a spreading employee revolt could jeopardize the value of their stakes in the artificial intelligence darling and that growing factions within the company would dampen OpenAI’s ability to hire in the future, according to a person at a firm that has invested in the startup. Employees and key investors, including Microsoft, which has committed $13 billion to the company, were given little or no notice of Altman’s firing.

If the tender is canceled, it would be a blow to former and current employees planning to participate. The price of the share sale is nearly triple the valuation of shares sold early this year and roughly four times a 2021 sale, meaning holders of stock priced before OpenAI’s revenue and valuation took off this year were in line for significant payouts. OpenAI recruiters had used the impending sale as a way to lure top AI researchers. Some investors may also have planned to sell in the tender.

The new valuation would also boost, on paper, the returns of a group of top investors who had bought shares during the past three years, including Sequoia Capital, Tiger Global Management and Andreessen Horowitz. Thrive, the New York investment firm run by Josh Kushner, has placed OpenAI at the center of a strategy this year to double down on winning bets during a period when many VC firms are pulling back. It also led the secondary share sale that valued the company at up to $29 billion in April. Its plans regarding the impending sale couldn’t be learned.

A canceled or lower tender price and the absence of Altman could make raising new money very challenging for OpenAI. Altman has privately said the startup could need to raise up to $100 billion to keep up with growing compute needs.

In a staff memo on Saturday, COO Brad Lightcap said the company remains strong, and he acknowledged that employees “are feeling confusion, sadness, and perhaps some fear,” according to a person familiar with the matter. Axios was first to report on the memo.

VC Support for Altman

Almost immediately on Friday, several representatives of the VC firms invested in OpenAI voiced support for Altman, suggesting some would follow the former Y Combinator president to a potential new venture.

Alfred Lin, a Sequoia general partner, wrote on X that he looked “forward to the next world-changing companies that” Altman and Brockman build.

Others compared Altman’s firing to another famous Silicon Valley expulsion. “What happened at OpenAI today is a Board coup that we have not seen the likes of since 1985 when the then-Apple board pushed out Steve Jobs,” Ron Conway, the founder of investment firm SV Angel, an investor in OpenAI, wrote on X. Jobs famously returned in 1997, leading Apple to develop flagship devices such as the iPhone.

Altman, a well-known figure in Silicon Valley, was already in talks with iPhone designer Jony Ive and SoftBank CEO Masayoshi Son about building a new AI hardware device, The Information earlier reported. Those discussions could have contributed to the board’s decision to oust Altman.

Vinod Khosla, founder of Khosla Ventures, has not commented directly and a spokesperson for the venture firm said it was not commenting. Khosla Ventures made the first outside investment in OpenAI when it established a for-profit arm in 2019. At an event on Wednesday, he defended OpenAI’s unusual corporate structure. On Saturday morning, he retweeted comments in support of Altman.

Altman, Tesla CEO Elon Musk and chief scientist Ilya Sutskever set up OpenAI as a nonprofit in 2015, an arrangement designed to distance AI research from financial incentives and keep its mission—developing AI for the public good—at its center. But in 2019, under pressure to obtain computing resources needed to train large language models, Altman set up the for-profit entity governed by the non-profit board.

Its shares are structured as profit units that could cap returns at 100 times the original investment amount, plus a 20% increase to that cap every year, starting in 2025. In the past, OpenAI’s unusual capital structure turned away some investors.

Turbulence within OpenAI is likely to further cast doubt on the structure. None of the major investors, including Microsoft, sit on the non-profit board that governs the startup. Instead, it includes Sutskever, Quora founder Adam D’Angelo, tech entrepreneur Tasha McCauley and Helen Toner, a director of strategy at Georgetown’s Center for Security and Emerging Technology. It’s not known how those directors voted on Altman's firing.

Previously, LinkedIn co-founder Reid Hoffman, former Texas congressman Will Hurd, and Neuralink executive Shivon Zilis were also on the board, but each resigned at different points in time earlier this year.

Yesterday’s episode sheds light on the dangers of these unusual board structures, according to Y Combinator co-founder Paul Graham. “When I talk to more established startups, one of the first things I want to know, after asking about the growth rate and whether they're profitable, is whether the founders still have board control,” he wrote on X. “I'm more optimistic about the company when the answer is yes.”