OpenAI is expected to consume $115 billion by 2029, while this year's revenue is projected to be only $13 billion, resulting in a significant funding gap.

Written by: Zhao Ying

Source: Wall Street Watch

OpenAI and Microsoft have "amicably parted ways," completing a year-long corporate restructuring and officially transforming into a Public Benefit Corporation (PBC), paving the way for a future IPO.

As OpenAI's largest shareholder, Microsoft holds a 27% stake valued at $135 billion after the restructuring, based on OpenAI's latest valuation of $500 billion. The two parties signed an agreement on Tuesday, allowing Microsoft to retain intellectual property rights to OpenAI's models and products until 2032, while both companies gained greater freedom to collaborate with competitors.

During Tuesday's all-staff meeting, OpenAI CEO Sam Altman indicated that an IPO might occur in the future but declined to disclose a specific timeline. He mentioned in a public livestream that "given our capital needs," an IPO is a possible option. OpenAI is expected to consume $115 billion by 2029, while this year's revenue is projected to be only $13 billion, resulting in a significant funding gap.

This restructuring diluted the equity of early investors, as the nonprofit arm, OpenAI Foundation, received 26% of the shares, valued at $130 billion. However, for investors, this opens the door to future liquidity exits, as SoftBank Group's board has approved its $22.5 billion investment plan, contingent on the completion of the restructuring.

Clear Path to IPO, Urgent Capital Needs

Altman revealed in the livestream that OpenAI has incurred $1.4 trillion in "financial obligations" due to commitments to use or develop 30 gigawatts of data center capacity. However, the company's revenue this year is expected to be only $13 billion, creating a significant gap between this and the projected $115 billion consumption by 2029, as well as server expenses.

An IPO would provide the company with crucial funding to address fierce competition from rivals like Google and xAI. The restructuring converted early investors' investments into common equity and removed the previous cap on potential financial returns, clearing institutional barriers for a potential IPO and greatly enhancing its appeal to public market investors.

While an IPO would further dilute existing shareholders' equity, it is vital for the company's continued operation. The restructuring has received tacit approval from the attorneys general of Delaware and California, who stated on Tuesday that they would not oppose the restructuring, citing OpenAI's commitment to its original mission of benefiting humanity as a nonprofit organization.

As part of the commitment to the attorneys general, OpenAI agreed to keep its safety and security committee independent from the company's board of directors. This committee, led by Zico Kolter, head of the machine learning department at Carnegie Mellon University, has the authority to block the release of dangerous AI. The new company charter signed by Altman on Tuesday includes a provision stating that the board can only consider the human interest mission when addressing safety and security issues, rather than shareholder interests.

Core of the Restructuring: Transition to PBC, Lifting Return Restrictions

OpenAI's transition from a nonprofit organization to a Public Benefit Corporation is a special corporate form under U.S. law that simultaneously pursues public benefit and profit goals in its decision-making process. The most critical change in this restructuring is the conversion of investments from various stakeholders into common equity and the removal of previous caps on potential financial returns.

The OpenAI Foundation now holds 26% of the restructured company and maintains control over the for-profit company's board through the power to appoint and remove directors. The foundation stated that it would use the initial $25 billion in funding to support health research and address social risks posed by AI, such as pandemics and job displacement caused by AI development.

If OpenAI's valuation exceeds $5 trillion within 15 years—at least 10 times its current valuation—the foundation will also receive warrants for additional shares. According to individuals involved in the restructuring discussions, at a $5 trillion valuation, the foundation could obtain shares worth hundreds of billions of dollars. Currently, there are no companies globally with a market value of $5 trillion, although Nvidia is nearing this level.

End of a Century Partnership: "Amicable Separation" from Microsoft

The relationship between Microsoft and OpenAI underwent a significant transformation during this restructuring. Microsoft previously invested about $13 billion in OpenAI and enjoyed preferential rights to profit distribution under the old structure, a benefit that no longer exists in the new agreement.

Under the new agreement, the relationship between the two parties has become more flexible:

• Intellectual Property and Collaboration: Microsoft will retain permanent rights to use OpenAI's intellectual property, applicable to all products developed by OpenAI before 2032, as well as non-public intellectual property developed internally before 2030. Even if OpenAI announces the achievement of Artificial General Intelligence (AGI) in the future, Microsoft can continue to use its models, provided it adheres to the corresponding safety guidelines.

• Open Collaboration: OpenAI has gained the freedom to collaborate with other cloud service providers (such as Oracle) without needing Microsoft's permission. In return, Microsoft can also collaborate more closely with OpenAI's competitors. Microsoft CEO Satya Nadella explicitly stated in an interview that he is pleased to see AI models from Anthropic and even Google landing on its Azure cloud platform. According to insiders, Microsoft engineers are pushing to integrate Anthropic's Claude model directly into Office software.

• Exclusion of Hardware: The agreement explicitly excludes the consumer hardware sector. This means that OpenAI does not need to share details with Microsoft when developing AI-driven consumer electronics, preserving space for independent exploration of new business opportunities.

Additionally, OpenAI has committed to paying Microsoft Azure cloud services $250 billion in leasing fees over the coming period, securing long-term stable income for Microsoft.

Reassurance for Investors and Employees

This restructuring has relieved investors and current and former employees, as it opens the door for an IPO. SoftBank Group's board has approved its $22.5 billion investment, contingent on the completion of the restructuring. SoftBank's funding is part of a $41 billion financing round that has allowed investors, including Dragoneer Investment Group and Thrive Capital, to collectively hold 15% of the company, currently valued at $75 billion.

Investors like Thrive Capital, which invested $6.6 billion in OpenAI last fall, hold a 4% stake valued at $20 billion. Current and former employees, along with investors who purchased shares from them, collectively hold about 26% of the equity. In recent years, employees have sold approximately $10 billion worth of shares to other investors, reflecting strong demand for these shares as the company's valuation skyrockets.

Janus Henderson portfolio manager Jonathan Cofsky manages two funds holding over $800 million in Microsoft stock. He stated, "This announcement eliminates a lot of uncertainty for Microsoft and its shareholders." He believes that Microsoft's exclusive rights to resell OpenAI models in the cloud are more important than having governance rights over this startup. "Bringing customers into Azure because of the OpenAI relationship will benefit Microsoft immensely even after 2032."

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