OpenAI (OPAI.PVT) is racing against time to restructure its business — a must for the company if it hopes to hang on to a part of a multibillion-dollar investment led by SoftBank and gain more control over how it deploys its revenue.
The plans call for OpenAI to transform its for-profit arm into a public benefit corporation overseen by its nonprofit parent. If the company fails to reach a deal by year’s end, it could kiss half of the $40 billion in funding goodbye. But OpenAI’s biggest impediment reportedly comes from its closest investing partner: Microsoft (MSFT).
The cloud computing giant invested $10 billion in OpenAI in 2023, following earlier outlays in 2019 and 2021. The investment gives Microsoft a major equity stake in OpenAI’s for-profit operations, along with exclusive access to OpenAI’s application programming interfaces (APIs) and models on Azure, revenue-sharing arrangements, and access to OpenAI’s intellectual property until 2030.
The team-up has been a boon for Microsoft, which has benefited from being able to sell OpenAI’s technologies to its customers. In the company’s fiscal 2024, Microsoft’s Intelligent Cloud segment, which includes its AI cloud services, generated $105 billion of the company’s $245 billion in total revenue.
But as OpenAI seeks to restructure its business, it’s also looking to break free from some of what it sees as the more onerous terms of the Microsoft deal. Now, the two companies are at loggerheads over the terms of a new deal. And unfortunately for OpenAI, it can’t move forward with its for-profit plans without buy-in from Microsoft.
OpenAI CEO Sam Altman, left, shakes hands with Microsoft CTO and executive vice president of artificial intelligence Kevin Scott during the Microsoft Build conference at the Seattle Convention Center Summit Building on May 21, 2024. (Jason Redmond/AFP via Getty Images) ·JASON REDMOND via Getty Images
The Wall Street Journal reported this week that negotiations between the two companies over a new for-profit structure have become contentious enough for OpenAI to consider asking antitrust regulators to get involved to find potential competition impediments in its agreement with Microsoft.
And on Wednesday, the Financial Times reported that Microsoft is willing to walk away from discussions entirely.
“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,” Microsoft and OpenAI said in a joint statement.
OpenAI isn’t just looking to change the terms of its existing agreements. According to Bloomberg, the company is also looking to block Microsoft from accessing technology from its $3 billion acquisition of AI coding tool Windsurf.
Another major issue is how much equity Microsoft would have in OpenAI’s restructured business. The Financial Times reported that the tech giant had offered to give up equity in exchange for access to future technology.
UCLA law professor Jill Horwitz said the power balance in the negotiations depends on details in the contracts between OpenAI and Microsoft.
“Microsoft’s powers depend on the agreements that it made with OAI, and those agreements are not publicly available. Nonetheless, the nonprofit has the responsibility to control any of these decisions in a manner that is in accordance with OAI’s binding, charitable purposes,” Horowitz explained.
An aerial view shows construction underway on a Project Stargate AI infrastructure site, a collaboration between OpenAI, SoftBank, and Oracle, in Abilene, Texas. (Reuters/Daniel Cole) ·REUTERS / Reuters
Microsoft has already changed at least one portion of its agreement with OpenAI. The company has given up exclusivity for OpenAI to use its Azure platform after OpenAI joined with Oracle (ORCL) and SoftBank to launch their Project Stargate data center plan in January.
Microsoft now has the right of first refusal for OpenAI’s cloud services as it builds out its capacity.
OpenAI began in 2015 as a nonprofit under the name OpenAI Inc., a nod to its mission of advancing humanity instead of pursuing profits.
Things got more complicated in 2019 when OpenAI CEO Sam Altman and his team created a for-profit subsidiary to raise outside venture capital, including billions from Microsoft.
It was structured so that the for-profit subsidiary, technically owned by a holding company owned by OpenAI employees and investors, remained under the control of the nonprofit and its board of directors while giving its biggest backer, Microsoft, no board seats and no voting power.
OpenAI had hoped to shed its nonprofit status to attract additional investors and renegotiate with existing ones. The move would have also detached it from its legal responsibility to carry out its original organizational purpose: to “advance digital intelligence in a way that is most likely to benefit humanity.”
Two major roadblocks prevented OpenAI from converting its nonprofit parent organization into a for-profit enterprise.
One is that the nonprofit OpenAI was legally required to receive fair market value in exchange for selling its assets. OpenAI was estimated at $300 billion in its latest funding round in March.
Unfair compensation to the nonprofit threatened to expose OpenAI to legal challenges, especially from state attorneys general and Delaware in particular, where the nonprofit is registered.
The company is also contending with a lawsuit filed by OpenAI co-founder Elon Musk against the nonprofit’s board members and co-founder Sam Altman, in which Musk is seeking to block OpenAI from converting to a for-profit business. That suit is already set for trial.
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Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on X/Twitter at @DanielHowley.
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