This week, a soft onethe feeling rumbling reached a strong consensus: Why is OpenAI structured that way?
In very stupid terms, its nonprofit arm has full control of the for-profit holding company, giving it the ability to fire Sam Altman as CEO without a single day’s heads-up. well-known Silicon Valley executive or any of the organization’s investors. . More technically, as stealth startup founder James Rosen-Birch explained to me, OpenAI is a tax-exempt charity wrapped in a holding company, which then has a majority stake (with Microsoft as a minority owner) of the for-profit part of OpenAI.
The story of the origin of OpenAI is now famous: a company founded to promote the research and development of artificial general intelligence and realizes that it needs a lot of money to do that. It needs money from investors and sovereign wealth funds who, of course, want returns, so they create a for-profit subsidiary that can give them equity. That subsidiary remains, however, under the full control of the tax-exempt charity and its board, who, unlike the investors, have no financial stake in the business, only the will to see that AI is used for the benefit of humanity. If this company structure gives you the ick, you are not alone.
Although no one knows exactly what happened, a common theory is that Altman’s for-profit efforts became at odds with the mission-driven nonprofit board.
In fact, Kimberly Bryant, the founder of Ascend Ventures, told us what most of the tech world was thinking: As OpenAI became more popular, got nice brand deals, and was looking for an almost $90 billion valuation, it introduced complex commercial could the board. felt at odds with the company’s stated goals. Although it is a nonprofit, vision misalignment is almost unknown in the for-profit sector, leading to conflicts between board directors and CEOs.
“Nonprofit entities inherently prioritize ‘serving the public good’ over profit maximization, a commitment that faces challenges amid the dynamics of hypergrowth and the divergent goals of investors ,” Bryant told TechCrunch+. “Issues arise when boards become overly controlling, overstep their authority, or act in self-interest… such dynamics not only impede progress but also pose a significant threat, which may cause serious damage to the organization or company.”
Rosen-Birch said OpenAI’s structure has created many overlapping problems and questions, such as whether a for-profit company is in a tax-exempt shell. Granted exist for the benefit of humanity without having to pay for shared public goods and services. “And perhaps the most important of the problem at hand, how does a board judge whether a company is acting in the interest of the people? What power do they have to enforce those interests,” he said. “In hindsight, it seems the board is as confused by (its answer to) the questions as we are.”
The latest update in the publication is that Microsoft, one of the biggest investors in OpenAI, wants Altman to work for them; almost the entirety of OpenAI has signed a petition to quit if he doesn’t return, and the fate of the OpenAI board is up in the air.
A cautionary tale
Although OpenAI’s board structure is unique, the fallout from the past few days should serve as a warning for founders and board members. Rarebreed Ventures founder McKeever Conwell said builders rarely consider the structure of their own boards to something drastic, like a Silicon Palace coup, was made against them. “Everybody wants to say the boards are broken, but they’re not,” he said. “People don’t know how to manage their boards.”
Bryant, who was ousted from his last company’s board, said the OpenAI mess can teach startups to be “careful” in choosing their board of directors, establishing clear expectations, imposing term limits, and diligently ensure alignment with the organization’s long-term vision.