Microsoft and OpenAI face complex negotiations on how Microsoft's investment of nearly 14 billion USD in the now significantly more valuable OpenAI will be converted into shares. OpenAI, known as the developer of ChatGPT, is currently transitioning from a non-profit organization to a for-profit company, having recently completed a funding round with a valuation of 157 billion USD.
As the largest investor, Microsoft could thus acquire a significant stake in OpenAI, which would make the company the second most valuable startup in the US after SpaceX. Both companies have hired investment banks to support the negotiations: Microsoft is working with Morgan Stanley, while OpenAI has engaged Goldman Sachs. Additionally, former Citigroup banker Michael Klein, who has close ties to OpenAI CEO Sam Altman, is advising the AI company.
A central topic of the negotiations is the question of how much equity Microsoft will receive in the newly structured OpenAI and what voting rights are associated with it. Additionally, it must be clarified how much stake CEO Sam Altman and the other OpenAI employees will receive. The unusual situation arises from the rare conversion of a non-profit organization into a for-profit company, especially for a company of OpenAI's size and valuation.
Microsoft has invested a total of $13.75 billion in OpenAI since 2019, including its share in the recent $6.6 billion funding round. These investments were made when OpenAI was valued significantly less than it is today. Currently, Microsoft, other private investors, and OpenAI employees hold rights to future profits of the for-profit subsidiary, which is controlled by OpenAI's non-profit board. Their returns are capped, depending on the time of issuance of these profit-sharing shares.
Another complexity is that a larger stake by Microsoft in OpenAI could draw the attention of antitrust authorities, who are already taking various measures to regulate the market power of large tech companies. Despite their close financial and technological connections, both companies also operate independently: Microsoft uses OpenAI's technology for applications like Copilot, while simultaneously expanding its own AI capabilities. Meanwhile, Sam Altman is seeking additional cloud computing partners.
Investors in OpenAI's latest funding round, including Nvidia, Thrive Capital, and SoftBank, have received debt securities that will be converted into fixed equity stakes once OpenAI becomes a for-profit company. OpenAI plans to become a "Public Benefit Corporation," committed to the public good alongside profit generation. A non-profit element will remain, holding shares in the newly structured company.
