OpenAI (OPAI.PVT) is under intense pressure to restructure its business model. The company needs this change to secure part of a multibillion-dollar investment led by SoftBank and to gain greater control over how its revenue is shared. The deadline is tight: if OpenAI fails to finalize a deal by the end of the year, it risks losing half of its $40 billion funding.
The Proposed Restructuring Plan
The plan calls for OpenAI to convert its for-profit arm into a public benefit entity managed by its nonprofit parent organization. This shift aims to better align the company with its original mission while maintaining financial support. However, the company faces a significant roadblock in its closest investment partner—Microsoft.
Microsoft’s Role and Stake in OpenAI
Microsoft has heavily invested in OpenAI, putting in $10 billion in 2023 alone, following earlier investments in 2019 and 2021. This made Microsoft the majority stakeholder in OpenAI’s for-profit operations. The deal also granted Microsoft exclusive access to OpenAI’s APIs and AI models via its Azure cloud platform, a revenue-sharing arrangement, and rights to OpenAI’s intellectual property until 2030.
For Microsoft, this partnership has been highly profitable. In its fiscal year 2024, the Intelligent Cloud division, which includes AI Cloud Services powered by OpenAI technology, contributed $105 billion to the company’s total revenue of $245 billion.
Disputes Over New Agreement Terms
As OpenAI attempts to restructure, it wants to revise and remove some of the more restrictive terms in its deal with Microsoft. Negotiations over the new agreement have reportedly grown intense, with the two companies currently at an impasse. OpenAI cannot proceed with its new profit plans without Microsoft’s agreement.
The Wall Street Journal recently reported that the discussions have become so contentious that OpenAI may ask antitrust regulators to review the partnership for potential anti-competitive barriers.
Microsoft’s Possible Withdrawal
On Wednesday, the Financial Times revealed that Microsoft might abandon the talks entirely. Despite this, both companies issued a joint statement saying, “We have had a long, productive partnership that has brought exceptional AI tools to everyone. Negotiations are ongoing, and we are optimistic that we will continue to work together for years to come.”
Additional Points of Contention
OpenAI also seeks to prevent Microsoft from accessing the technology from its $3 billion acquisition of the AI coding tool Windsurf, Bloomberg reported. Another unresolved issue is Microsoft’s equity stake in the reorganized OpenAI business. According to the Financial Times, Microsoft has offered to surrender its equity in exchange for continued access to OpenAI technology.
Legal and Structural Complexities
UCLA law professor Jill Horwitz explained that the balance of power in negotiations depends heavily on contract specifics, which remain confidential. She noted, “The nonprofit still has a responsibility to control these decisions in a way consistent with OpenAI’s charitable mission.”
Microsoft has already modified part of its deal. For example, it relinquished exclusive rights to OpenAI’s Azure platform after OpenAI launched Project Stargate, a data center initiative in partnership with Oracle and SoftBank. Microsoft now holds first refusal rights as OpenAI expands its cloud service capacity.
OpenAI’s Origins and Evolution
Founded in 2015 as a nonprofit called OpenAI Inc., the company’s goal was to advance human progress through digital intelligence rather than focus on profits. This changed in 2019, when CEO Sam Altman and his team formed a for-profit subsidiary to attract venture capital funding, including billions from Microsoft.
Today, the for-profit subsidiary is owned by a holding company controlled by OpenAI’s nonprofit board. Microsoft, despite its large investment, has no board seats or voting rights.
Challenges to OpenAI’s Transition Plans
OpenAI aims to drop its nonprofit status to attract more investors and renegotiate terms with current backers. This would also free the company from its legal obligation to pursue its original mission “to advance digital intelligence in ways that benefit humanity.”
Two major challenges stand in its way:
Legally, the nonprofit must receive fair market value for selling its assets. OpenAI’s latest valuation hit $300 billion in March. Underpaying could lead to lawsuits, especially from state attorneys general or Delaware, where the nonprofit is registered.
OpenAI is currently embroiled in a lawsuit filed by co-founder Elon Musk against CEO Sam Altman and others on the nonprofit board. Musk seeks to block the shift to a for-profit business. The case is now in trial.
