OpenAI transitions to a for-profit enterprise, how will Microsoft's nearly $14 billion investment convert to equity? Negotiations have begun

To prevent hostile takeovers and protect CEO Ultraman from external interference, AI leader OpenAI plans to restructure from a non-profit organization to a for-profit public benefit corporation (PBC). However, this also puts OpenAI and Microsoft in a high-risk negotiation, focusing on how to convert Microsoft's nearly $14 billion investment in the non-profit organization into equity in a for-profit company.

Both sides have hired investment bank advisors to prepare for negotiations

According to media reports, OpenAI recently completed a new round of $6.6 billion in financing, with a valuation of $157 billion, making it the second largest startup in the United States after SpaceX based on current valuation standards.

As previously reported, OpenAI plans to transform into a public benefit corporation, meaning its mission is to generate both social benefits and profits, and operate sustainably. Analysis suggests that one of the biggest challenges it faces as a for-profit company is how to distribute equity. As the largest investor in OpenAI to date, Microsoft may receive a significant amount of equity in the company.

Both Microsoft and OpenAI have hired investment banks to provide advice for this negotiation, highlighting its importance. According to sources familiar with the matter, Microsoft is working with Morgan Stanley, while OpenAI has hired Goldman Sachs. In addition to Goldman Sachs, OpenAI has also hired former Citibank banker Michael Klein, who has a close relationship with CEO Ultraman, as an advisor.

Furthermore, in addition to determining how much stake Microsoft will have in the for-profit company after the restructuring, both parties must also agree on what governance rights Microsoft will obtain.

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In fact, the transformation of a non-profit organization into a for-profit company is not common, especially for a company of the size and value of OpenAI.

Currently, Microsoft, other private investors, and OpenAI employees have rights to future profits of the for-profit public benefit corporation, which is controlled by OpenAI's non-profit board. Since 2019, Microsoft has invested $13.75 billion in OpenAI, including its share in OpenAI's recent $6.6 billion financing. Moreover, Microsoft's early investments were made when OpenAI's valuation was much lower than it is now.

Another key issue is how much equity Ultraman and other employees will receive in the newly established for-profit company.

Analysis suggests that the complexity of the situation is further compounded by the fact that the larger Microsoft's ownership stake, the more likely it is to face antitrust regulatory scrutiny, as regulatory bodies have already taken multiple measures to limit the power of tech giants.

The relationship between Microsoft and OpenAI is quite complex, with the two closely intertwined financially and technologically. Microsoft is the exclusive cloud services provider for OpenAI and uses its technology to develop the Copilot AI application. At the same time, Microsoft is also enhancing its own AI capabilities, while Ultraman is seeking other cloud computing resources Investors participating in the latest financing round of OpenAI include Nvidia, investment firm Thrive Capital, and SoftBank. Debt investments will be converted into fixed equity stakes when OpenAI becomes a profitable company.

In addition to transitioning into a nonprofit entity, OpenAI will still retain a nonprofit portion that will hold a stake in the restructured company. Analysts believe that this adds another layer of complexity to the already intricate negotiations with Microsoft.

According to the financing agreement, OpenAI has two years to become a profitable company, otherwise investors in the latest round of financing can request a refund of the funds they provided