On Saturday, reports emerged suggesting that the OpenAI non-profit board may resign as a result of a deal influenced by Microsoft. Jason Kwon, the company's chief strategy officer, expressed optimism about the potential return of senior staff members who resigned in protest. Microsoft's substantial financial support plays a vital role in OpenAI's operations. While OpenAI boasts a high valuation due to venture capital investments, a significant portion of it relies on share sales, making Microsoft the sole investor to provide substantial cash and resources directly to OpenAI. The sustainability of OpenAI without continuous funding from Microsoft remains uncertain. Although OpenAI is witnessing some revenue growth, the profitability of the company remains unclear, and costs are likely to be high.
Another critical factor is OpenAI's heavy reliance on Microsoft's cloud computing datacenters. This dependency makes it challenging for OpenAI to switch to an alternative service provider. Consequently, Microsoft holds considerable leverage over OpenAI, as it could potentialy withdraw funding and computing resources unless certain conditions are met.In the future, Microsoft could potentially replace OpenAI's technology with software from another leading AI startup like Cohere or a newer player like Mistral. Additional possibilities also exist, such as the formation of a new AI company by Altman and OpenAI's co-founder, president, and former board chairman. Nadella, the CEO of Microsoft, has assured Altman of his support in any decisions made.
While OpenAI's other investors, including Khosla Ventures, Reid Hoffman's charitable foundation, Tiger Global, Andreesen Horowitz, Sequoia Capital, Thrive, and K2 Global, have less influence on the company, they retain some leverage through OpenAI's employees. These employees possess an interest in selling their profit participation shares, functioning like stock options, to investors at high valuations. If investors threaten to withdraw from a tender offer for these shares, the employees may face financial consequences. Consequently, this situation may incentivize them to leave OpenAI or at least threaten to do so unless Altman is reinstated.
The current situation at OpenAI exposes flaws in its corporate governance structure. Microsoft holds minority ownership in a limited liability corporation, with the majority owned by a holding company jointly possessed by OpenAI's non-profit board, employees, and other venture capital investors. However, control over this holding company resides with OpenAI's non-profit through another limited liability corporation. OpenAI's non-profit corporate board comprises six members who must lack a financial interest in the holding company or the LLC, in which Microsoft made its investment. This arrangement bars Microsoft and other investors from influencing the hiring or firing of OpenAI's CEO.
This governance structure was devised to facilitate OpenAI's enormous fundraising requirements for its artificial general intelligence (AGI) mission, while safeguarding against domination by a single tech giant. Altman had a significant role in creating this structure; nonetheless, he made a deal with Nadella, effectively transferring control to Microsoft. Ironically, if OpenAI's non-profit board requests Altman's return and resigns, it would expose the structure's inability to remain independent from control by a big tech corporation.In 2015, OpenAI was established by Altman, Brockman, Sutskever, and Elon Musk, with the primary goal of preventing a single tech company from monopolizing Artificial General Intelligence (AGI). The co-founders were concerned about the rapid progress in AI research, particularly after Google's acquisition of DeepMind in 2014. They feared that if DeepMind achieved AGI, Google would have undue influence and control over this groundbreaking technology. To counter this, the co-founders created OpenAI as a non-profit organization, aiming to develop AGI for the benefit of all humanity rather than for the profit of a single corporation's shareholders. Musk initially pledged $1 billion to support this mission.
However, OpenAI soon faced a funding challenge due to the substantial expenses associated with pursuing AGI through extensive deep learning models and the need for vast datacenter resources. Altman admitted underestimating the financial requirements to compete in the AGI race. The situation worsened when Musk stepped down from OpenAI's board due to disagreements with Altman and the other co-founders regarding the control of the research lab's direction. Musk's departure also meant the loss of his $1 billion pledge. Despite Musk's previous donation of $40 million, the total donations received by the non-profit amounted to $130.5 million, which were insufficient to effectively compete with Google DeepMind.
To address the funding shortfall after Musk's departure, Altman realized the inefficiency of relying solely on tax-deductible donations. He recognized the potential of securing venture capital as a faster and more effective solution, given that investors expect a return on their investment. Altman also saw an opportunity to access computing resources by negotiating with a major cloud service provider, which would provide both cash and computational power.
Ironically, Altman's strategic decision to seek financial support and resources through conventional investment methods, rather than relying solely on donors, could impact the structure of OpenAI and potentially secure his position as CEO. This outcome diverges from the initial intent of establishing a board to safeguard OpenAI's AGI mission.
The challenges faced by OpenAI will also lead investors to closely examine the governance structure of Anthropic, a rival AI company formed in 2021 by researchers who split from OpenAI. These researchers were concerned that OpenAI's focus on commercial interests after Microsoft's investment compromised the company's dedication to AI safety. Anthropic operates as a B Corporation, which has a more transparent structure compared to OpenAI. B Corporations prioritize the interests of multiple stakeholders rather than just shareholder profits and have a fiduciary duty to society. Anthropic's board includes a seat for venture investors, while a Long-Term Benefit Trust, consisting of AI safety and national security experts with no financial stake in Anthropic, has the authority to appoint an increasing number of directors based on specific AI milestones. Within four years, the Long-Term Benefit Trust can also gain majority control of Anthropic's board.
Given the upheaval at OpenAI, it is expected that investors in Anthropic will carefully scrutinize this governance structure to ensure stability and alignment with their goals.