Microsoft and OpenAI may be working on a decidedly newfangled technology, but they’re haggling over an age-old business question: How much equity should I get for my investment?
The two companies each hired investment banks to help answer how Microsoft’s roughly $13.75 billion worth of investments in OpenAI since 2019 will translate after the startup converts from a nonprofit to a for-profit corporation, according to the Wall Street Journal.
OpenAI hired Goldman Sachs to advise it during the process, and Microsoft brought on Morgan Stanley, the Journal reported. The two blue-chip banks will now have to help their clients, who have deep ties, navigate a thorny financial question as they determine how much of OpenAI will be owned by Microsoft.
Microsoft and Morgan Stanley declined to comment. OpenAI and Goldman Sachs did not respond to a request for comment.
The negotiations over Microsoft’s ownership stake come as OpenAI’s valuation has soared.
The developer behind ChatGPT was valued at $157 billion after it closed a round of funding earlier this month. Investors in that round included the chipmaker Nvidia, venture capital firm Thrive Capital, and Masayoshi Son’s SoftBank. In January 2023, just a few months after the November 2022 release of ChatGPT-3, Microsoft made a massive $10 billion investment into OpenAI that valued the startup at $86 billion.
Meanwhile, OpenAI is still unprofitable and projects a $5 billion loss this year on $3.7 billion in revenue. Yet OpenAI expects to see extraordinary growth, with its top line ballooning to $11.6 billion next year, according to internal company estimates reported by the New York Times.
Under OpenAI’s nonprofit status, Microsoft’s investment entitled it to a portion of the profits generated from a for-profit subsidiary that was run by the board of OpenAI. The for-profit subsidiary was originally structured to cap the profits it could reap. Microsoft’s portion of the cap was also capped at a certain level.
In September, Reuters reported that OpenAI intends to restructure itself into a for-profit public benefit company, a special designation that would allow it to commit itself to goals meant to better society as well as return value to shareholders.
The nonprofit will still exist, although it won’t continue to be the entity under which the new for-profit version of OpenAI operates. The nonprofit will still own a minority stake in the new for-profit version of the company. The move was made in an effort to make the company more attractive to investors, who presumably are eagerly lining up to make offers for a stake in the company synonymous with the AI revolution.
As part of its restructuring, OpenAI will also give CEO Sam Altman equity in the company. Altman previously said he had a “tiny bit of exposure via the YC investment,” referring to Y Combinator, the legendary startup accelerator of which he was the president. In this newly formed company Altman, and other leaders, would likely be granted a much larger share, as is common practice for executives.
At a companywide meeting in September, Altman said there were no plans for him to get a “giant equity stake” in OpenAI after earlier reports said that he might receive as much as 7% of the company. At the same meeting, Altman and OpenAI CFO Sarah Friar mentioned that investors had raised concerns about Altman not having a stake in the company he was leading.
Microsoft will also likely seek to negotiate the extent of its governance rights in OpenAI. When OpenAI’s board briefly fired Altman in November 2023, Microsoft CEO Satya Nadella was caught off guard by the decision, despite the company’s massive investments in OpenAI. In a series of media appearances following Altman’s reinstatement, Nadella reiterated Microsoft’s commitment to OpenAI but hinted that he would want greater say in its corporate governance.
“At this point, I think it’s very clear that something has to change around the governance,” Nadella told CNBC in November 2023, as Altman’s ouster was unfolding.