Microsoft and OpenAI have initiated high-stakes negotiations to convert Microsoft's $13.75 billion investment in OpenAI into equity, as OpenAI plans to restructure from a nonprofit to a for-profit public benefit corporation (PBC). Both companies have hired investment banks for advice, highlighting the negotiation's significance, with Microsoft collaborating with Morgan Stanley and OpenAI working with Goldman Sachs and advisor Michael Klein, a former Citibank banker.
Recently, OpenAI completed a $6.6 billion funding round, elevating its valuation to $157 billion, making it the second most valuable startup in the U.S. after SpaceX. As OpenAI transitions to a PBC, it aims to balance social good with profitability in a sustainable manner. Microsoft's potential acquisition of substantial equity is complicated by the scrutinies of antitrust regulations.
Microsoft's deep financial and technological ties with OpenAI add to the negotiation's complexity. Microsoft is not only OpenAI's exclusive cloud services provider but also utilizes its technology for applications like Copilot AI while enhancing its own AI capabilities. OpenAI CEO Sam Altman is exploring additional cloud computing resources.
The negotiations must address the equity distribution for Altman and other employees in the new entity, considering that excessive Microsoft ownership might provoke antitrust examinations amidst regulatory efforts to limit tech giants' power.
The recent funding round included investors like Nvidia, Thrive Capital, and SoftBank, with investments convertible to equity under the new for-profit structure. OpenAI's nonprofit segment will still hold some equity post-restructuring, adding complexity to discussions with Microsoft. OpenAI has a two-year timeline to achieve profitability, failing which recent investors can request their funds back under the financing agreement.
