OpenAI’s New Corporate Structure Sets Up a Tangled Legal Future

OpenAI’s new corporate structure sets the stage for what legal experts believe is a complex relationship between its nonprofit parent and for-profit subsidiary that could be the subject of future litigation.

Earlier this week, the parent of ChatGPT said it would keep its nonprofit parent but change its capped-profit LLC subsidiary to a public benefit corporation (PBC). A PBC is a for-profit company that commits to spending some of its profits on a specific public benefit.

Here’s how the two are different at OpenAI:

• The capped-profit LLC limits the ROI of its first-round investors to 100 times their investment with later investors capped at a lower rate. CEO Sam Altman has no stake in the subsidiary.
• The PBC would not cap investor profits. However, it has to divert some resources to a stated public good, unlike traditional for-profit companies. Employees and investors can own equity, and the nonprofit parent will have a majority stake.

Under the capped-profit LLC, the nonprofit parent oversaw and controlled the subsidiary. This will not change with the PBC.

The shift to a PBC helps OpenAI attract more funding, since most investors won’t want a cap on their ROI. It needs more capital because training AI models and ensuring there’s enough compute requires “hundreds of billions of dollars” and even “trillions of dollars,” wrote Altman in a May 5 letter.

For instance, OpenAI and SoftBank are leading a $500 billion program to build AI data centers to power increasing compute demands from AI.

The road to AI leadership began humbly: OpenAI was founded as a nonprofit AI lab in 2015. But had a hard time raising enough capital for AI. So it created the capped-profit subsidiary in 2019.

Most recently, OpenAI wanted to convert to a for-profit company, with the nonprofit as a separate entity instead of its parent.

That decision led to the following events:

• The Delaware attorney general reportedly sent a letter to OpenAI seeking information about its for-profit plans and transfer of assets.
• The California attorney general, which oversees nonprofits in the state, sent OpenAI an inquiry letter asking for information about its plans to transfer or dispose of assets under the nonprofit.
• Elon Musk, who co-founded OpenAI before leaving over a dispute about control, sued to stop them.
• Twelve former OpenAI employees supported Musk in his court fight.
• A group of former OpenAI employees, Nobel laureate Geoffrey Hinton, academicians and others signed an open letter urging the attorneys general of California and Delaware to stop the move.

OpenAI later abandoned its for-profit plan to land on its hybrid-PBC structure.

But Musk’s lawsuit will go on. His attorney Marc Toberoff told Reuters that OpenAI’s new structure will not change the company’s mission to develop “closed-source AI for the benefit of Altman, his investors, and Microsoft.”

OpenAI said what motivated the change was its ongoing dialogue with civic leaders and the attorneys general of California and Delaware, where OpenAI is incorporated. The company also appointed nonprofit commissioners to advise its nonprofit board. The PBC will have its own board of directors, who will be chosen by the nonprofit board.

Read more: OpenAI to File Scaled-Back Restructuring That Keeps Nonprofit in Charge

Marcus Wolter, partner and global director of corporate practice at the law firm Caldwell, told PYMNTS that the PBC structure is an improvement.

“For OpenAI, it is still a better situation,” Wolter said. “They will be able to raise capital more easily and, as a public benefit company, they are merely required to balance the impact of the actions taken with the interests of all stakeholders and not just shareholders.”

OpenAI “should also have more governance and operational flexibility,” Wolter continued.

OpenAI’s structure is unusual but not unique, said Angeli Patel, executive director at the Berkeley Center for Law and Business at the University of California at Berkeley, who is an attorney specializing in corporate governance and startup law.

“It’s not necessarily a new thing,” Patel told PYMNTS. Companies that have these “dual structure boards” are this way largely because “they have a public benefit mission or orientation.”

Patel pointed to similar examples from companies such as Hershey, which has a trust that is the majority shareholder of the company, and Mozilla, which started out as a nonprofit that later created a for-profit arm.

However, Patel said that OpenAI’s situation is particularly notable due to the nature of the tension between its original mission and growing commercial ambitions.

“The unique thing in the case of OpenAI is how they started with this mission to be a responsible, ethical AI-developing company,” Patel explains. “Over the past two years, you’ve seen AI take off with OpenAI leading that charge. And the thing that’s happening now is this clear contention between its original ethical AI-first mission and its commercial goals” that appear to be “more important.”

When asked if Musk’s legal challenge has merit, Patel didn’t dismiss it outright. “Elon’s entire argument is that the company is deviating from the initial promises it had made to him as an early investor. And I think that’s a valid argument,” she said, while noting that Musk’s motivations might go beyond legal concerns.

The transfer of intellectual property from the nonprofit to the for-profit entity also raises legal questions. “It’s a huge issue, and I think we’re going to see a lot more litigation around this, especially from some of the already invested parties,” Patel predicted.

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