OpenAI Non-Profit Could Profit From Non-Profit Selling For-Profit In Expectation of Profit?
Importance: 4 | # | acx, openai
ACX:
Last month, I put out a request for experts to help me understand the details of OpenAI’s forprofit buyout. The following comes from someone who has looked into the situation in depth but is not an insider.
So why is OpenAI unhappy with its current situation? They’ve already provided us the answer - it makes it harder to sell stock, or makes the stock worth less (so much so that participants in a recent funding round made the money conditional on a change to the structure). But why would it do this?
Now the most mind-bending part:
How Will Altman Turn OpenAI Into A Forprofit?
First, he’ll start a new shell company. Realistically this will also be named OpenAI, but to avoid confusion, let’s call it Altman Skulduggery, Inc. ASI will offer to buy OpenAI LLC from the nonprofit for its fair value (some sources say he plans to bid $40 billion). The board (made of hand-picked Altman loyalists) will agree. ASI (a normal forprofit) will get all of OpenAI’s useful corporate assets, and the nonprofit will get $40 billion, which it can spend on benefitting humanity if it wants.
Where will Altman get $40 billion? He won’t; rather, he’ll offer the nonprofit shares in Altman Skullduggery, Inc.
Why are shares in ASI, a meaningless shell company with no assets, worth anything? Because it will soon own OpenAI, an exciting cutting-edge AI lab!
I am naive to the ways of finance, so this originally struck me as some kind of ridiculous perpetual motion bullshit. But I was eventually convinced it made sense. Suppose that OpenAI is currently underperforming its potential because it’s stuck in an awkward nonprofit governance structure; it ought to be worth $100 billion, but given the awkward governance it’s only worth $30 billion. ASI could bid 40% of its shares. Then, when OpenAI leaves the nonprofit and its value shoots up from $30 billion to $100 billion, both sides will have won: the nonprofit will have received $40 billion in ASI stock for its $30 billion asset (a profit of $10 billion), and ASI will have received a 60% share in OpenAI for nothing (a profit of $60 billion). Therefore, both sides are happy! I guess maybe this is how all private equity works.
Essentially, if you are skilled and have a vision for increasing some company's value and you can convince others of it, then you can ask for a portion of the company to be just given to you inexchange for you value-generation efforts.