Artificial Intelligence, AI, Corporate Governance, Business, Tech, OpenAI, Sam Altman
By Chrysolyte Egonu,
Senior Associate, OAKE Legal
Recently, news filtered in that the board of directors of OpenAI (owners of the artificial intelligence software ChatGPT) had fired its co-founder and former CEO Sam Altman – only 4 persons took the decision, and it happened via a video call on Google Meet. The method by which the former CEO was ousted brought to the fore further information including the fact that the co-founder had no shares in OpenAI.
If you are familiar with corporate concepts like ownership, equity, capital raises, and control, you may struggle to fathom how the co-founder and CEO of a company valued at over $80billion had no shares in it and could be easily and unconventionally booted out from the company. Well, unlike the typical business structure you may be familiar with, OpenAI has a very unusual and unconventional business structure which may provide a context to the events of the weekend.
The history of OpenAI is instrumental to understanding what may have influenced the decision of its board to fire Altman. OpenAI started out in late 2015 as Open AI Inc, a section 501(c)(3) non-profit with the goal of “building safe and beneficial artificial general intelligence for the benefit of humanity”. The company believed this structure would be “the most effective vehicle to direct the development of safe and broadly beneficial AGI while remaining unencumbered by profit incentives”. Although the company acknowledged that its AI venture will be capital intensive, it possibly overestimated the generosity of donors whom it banked on to fund its objectives. The brutal reality of capitalism hit when the company raised only about $130.5 million in total donations out of its non-profit goal of $1 billion. This amount did not scratch the surface and could only cover initial exploratory work in deep learning, safety, and alignment.
Given the paucity of funds, OpenAI Inc then devised a structure to preserve its non-profit’s core mission, governance, and oversight while enabling it to raise the capital for its mission. This structure meant that–
OpenAI’s non-profit entity- OpenAI Inc would remain in existence, with its board continuing as the overall governing body for all OpenAI activities.
A new for-profit subsidiary- OpenAI Global LLC would be formed, capable of issuing equity to raise capital and hire world class talent, but still at the direction of the non-profit.
The for-profit entity would be legally bound to pursue the non-profit’s mission. OpenAI’s guiding principles of safety and broad benefit would be central to its approach.
The for-profit’s equity structure would have caps that limit the maximum financial returns to investors and employees to incentivize them to research, develop, and deploy artificial general intelligence (“AGI”) in a way that balances commerciality with safety and sustainability, rather than focusing on pure profit-maximization.
The non-profit would govern and oversee all such activities through its board in addition to its own operations.
In further detail, this meant the following-
OpenAI Inc wholly owns and controls a manager entity OpenAI GP LLC that has the power to control and govern the for-profit subsidiary OpenAI Global LLC. This is a waterfall structure with the non-profit at the top of the waterfall. The Board of Directors of the non-profit therefore control the direction and actions of the for-profit entity.
Because the board is still the board of a non-profit, each director is mandated to perform their fiduciary duties in furtherance of the OpenAI mission—safe AGI that is broadly beneficial. While the for-profit subsidiary is permitted to make and distribute profit, it is subject to this mission. The non-profit’s principal beneficiary is humanity, not OpenAI investors.
The majority of the board is independent. Independent directors do not hold equity in OpenAI. (Even OpenAI’s former CEO, Sam Altman, did not hold equity directly).
Profit allocated to investors and employees, including Microsoft, is capped. OpenAI limited the “multiple” and returns that investors could make from funding it. According to the CNBC, “At the time, the profit cap was set at 100x of a first-round backer’s investment. In plain language, if investors put in $1, even if OpenAI was making billions of dollars in profit, that investor would be limited to $100 in total direct profit. It would still be a sizeable return, but not unlimited”
The board determines when OpenAI has attained AGI. AGI means a highly autonomous system that outperforms humans at most economically valuable work. The AGI system is excluded from IP licenses and other commercial terms with Microsoft.
From a profit and commercial perspective, this structure may be awkward and unusual but from a non-profit, principle, and philosophy-based perspective, this structure is likely ideal. Having been initially conceived as a non-profit, OpenAI had consistently maintained that it exists to ensure that safe artificial general intelligence is developed and that it benefits all of humanity. The mission was clear such that the tech giant Microsoft which has invested over $13billion in OpenAI is without a board seat or control and with its equity returns capped. This philosophy may also provide the context on why Altman had no shares in the Company – the founders had probably put altruism before profit so as not to be enticed by it.
Although Altman was not fired for any performance related issues, it is reported that it had become “impossible to oversee” the co-founder. Some other sources are quoted to report that “The board reached the point where they couldn’t believe what Sam told them”. If any of these reports are true, then it may reveal that the board might have considered Altman as too ‘ambitious’ or ‘moving too fast’ therefore threatening the commitment to its safety and non-profit objective for AI.
With the attention now beamed on OpenAI and its governance structure, the uncertainty and potential risk posed to its investors, and the possibility of its investors demanding more protective terms and a seat at the table, will OpenAI maintain its current governance structure? Will it be able to hold on to its founding ideals or will profit eventually trump altruism? In Silicon Valley, time reveals all things.
Originally published by Chrysolyte Egonu on LinkedIn
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