The $14 Billion Question Dividing OpenAI and Microsoft

OpenAI and Microsoft MSFT -0.32%decrease; red down pointing triangle are facing off in a high-stakes negotiation over an unprecedented question: How should a nearly $14 billion investment in a nonprofit translate to equity in a for-profit company?

The startup behind ChatGPT is transitioning from a nonprofit organization to a for-profit corporation after it recently closed a funding round valuing it at $157 billion. Determining how to distribute equity when it becomes a for-profit is one of the biggest challenges it faces.

As OpenAI’s biggest investor by far, Microsoft could end up owning a large stake in what would be, by current measures, the second-most-valuable startup in the U.S. behind SpaceX.
In a sign of how significant the outcome will be for Microsoft and OpenAI, both have hired investment banks to advise them on the process. Microsoft is working with Morgan Stanley MS -2.19%decrease; red down pointing triangle and OpenAI has tapped Goldman Sachs GS -1.87%decrease; red down pointing triangle, according to people familiar with the matter.

In addition to figuring out how big a piece of the restructured artificial intelligence company Microsoft will own, the two sides must figure out what governance rights it will have.

It is unusual for nonprofits to convert to for-profit companies and particularly so for a company of OpenAI’s size and value.

Microsoft, other private investors and OpenAI employees currently own rights to future profits generated by a for-profit subsidiary controlled by OpenAI’s nonprofit board. Their returns are capped based in part on when they were issued these profit participation units.

Microsoft has invested $13.75 billion in OpenAI since 2019, including its share of the startup’s latest $6.6 billion fundraise. Its earlier investments were made when OpenAI was worth substantially less than it is today.

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