This weekend, a soft, rumbling feeling reached a loud consensus: Why the heck was OpenAI structured that way?
In very dumb words, its nonprofit arm had complete control over the for-profit holding company, giving it the ability to oust Sam Altman as CEO without even a day’s heads-up to the well-known Silicon Valley executive or any of the organization’s investors. More technically, as explained to me by stealth startup founder James Rosen-Birch, OpenAI is a tax-exempt charity wrapped around a holding company, which then has a majority stake (with Microsoft as a minority owner) in the for-profit side of OpenAI.
OpenAI’s origin story is now famous: a company that was founded to advance research and development into artificial general intelligence and realized it needed lots of money to do that. It took money from investors and sovereign wealth funds who, of course, wanted returns, so they created a for-profit subsidiary that could issue them equity. That subsidiary remained, however, under complete control of the tax-exempt charity and its board, who, unlike the investors, did not have a financial stake in the business, only the will to see that AI was used for the good of humanity. If this company structure gives you the ick, you are not alone.
Though no one knows precisely 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, founder of Ascend Ventures, told us what many in the tech world were thinking: As OpenAI became more popular, struck pretty brand deals, and sought a near-$90 billion valuation, it introduced commercial complexities that the board may have felt were contrary to the company’s stated objectives. Though it is a nonprofit, vision misalignment is hardly unknown in the for-profit sector, leading to conflicts between board directors and CEOs.
“Nonprofit entities inherently prioritize ‘serving the public good’ over maximizing profit, a commitment that faces challenges amid the dynamics of hypergrowth and the diverse objectives of investors,” Bryant told TechCrunch+. “Issues arise when boards become overly controlling, overstep their authority, or act with self-interest … such dynamics can not only impede progress but also pose a significant threat, potentially causing severe damage to the organization or company.”
Rosen-Birch said OpenAI’s structure created several overlapping problems and questions, such as whether a for-profit company in a tax-exempt shell really exists for the good of humanity if it doesn’t have to pay for shared public goods and services. “And perhaps most relevant to the problem at hand, how does a board judge whether a company is acting in the interest of humanity? What power do they have to enforce those interests,” he said. “In hindsight, it seems the board was just as confused about [the answer to these] questions as we are.”
The latest update as of publication is that Microsoft, one of OpenAI’s biggest investors, wants Altman to work for them; nearly the entirety of OpenAI has signed a petition to quit if he doesn’t come back, and the fate of the OpenAI board is up in the air.
A cautionary tale
Though OpenAI’s board structure is unique, the fallout from the last few days should serve as a cautionary tale for founders and board members. Rarebreed Ventures founder McKeever Conwell said founders rarely pay attention to the structure of their own boards until something grave, like a Silicon Palace coup, is staged against them. “Everybody wants to say boards are broken, but they’re not,” he said. “People just don’t know how to manage their boards.”
Bryant, who was ousted from her last company by the board, said the OpenAI mess could teach startups to “meticulously” choose their board of directors, establish clear expectations, impose term limits, and diligently ensure alignment with the organization’s long-term vision.