Sam Altman, CEO of ChatGPT maker OpenAI, speaks during a national conference hosted by Senate Majority Leader Chuck Schumer (D-NY) at the U.S. Capitol on September 13, 2023 in Washington, USA. Attended a bipartisan artificial intelligence (AI) insights forum for senators.
Leah Millis | Reuters
OpenAI’s unusual corporate structure weakened Sam Altman’s position as CEO, and he was surprised by his immediate ouster from the company on Friday.
It’s rare to see a founder forced out of the company he helped co-found.in UberFor example, founder Travis Kalanick was fired only after a series of reports about privacy issues, discrimination, and sexual harassment allegations at the ride-sharing company.
But co-founder Greg Brockman, who also left OpenAI on Friday, didn’t have Kalanick’s power.
“I don’t have any stock in OpenAI,” Altman said of Sen. John Kennedy’s reaction to AI during a Senate hearing in May, which hinted at some foreshadowing.
“You need a lawyer or an agent,” Kennedy joked, now presciently.
The company’s structure helps explain how he was left in a vulnerable position and felt, as he said Saturday, that:slightly twisted. ”
OpenAI’s capped revenue structure
The easiest way to think Structure of OpenAI It’s about imagining a waterfall. The board of directors is at the top. OpenAI Global, a limited-profit company in which Microsoft invested billions and Sam Altman became the world’s face, is at the bottom. There’s something in the middle.
So let’s start at the top of the waterfall. OpenAI’s board of directors – the ultimate decision-making body and the group responsible for ousting Mr. Altman – controls OpenAI’s 501(c)(3) charity, his OpenAI Inc. . The charity is, as you know, a non-profit organization. It was founded to “ensure that secure artificial general intelligence is developed and benefits all humanity.”
The company’s website states that its nonprofit charter “supersedes any obligation to generate a profit.” In other words, nonprofits will be prioritized, while Open AI Global subsidiaries with limited profits will not.
There is a holding company and a separate LLC called OpenAI GP, both of which give the board of directors ownership or control over OpenAI Global. Again, this is a company Microsoft has invested in. Altman is the company you hear about when you hear about things like his development of ChatGPT in the news. The important thing here is that OpenAI Global had no control. It was something that was controlled or owned in various ways by all the other entities.
If everything is run by nonprofit organizations, why are there for-profit companies at the end of the corporate structure? There’s a reason for that, too.
limited returns
OpenAI added the OpenAI Global subsidiary with limited profits in 2019. The move was prompted by several things, including a desire to attract top employees and investors with “startup-like capital.”
Remember, if your ultimate goal is to ensure the safe use of AI, you need to hire really smart people. And that’s difficult when they think all the big companies in the market are going to pay them top dollar to work for them. So, in the case of OpenAI, incentives are needed.
As part of the transition to a for-profit model, OpenAI had to reevaluate how it rewards employees and investors who bet on the company. The company settled on an approach that would cap profits. This limited the “multipliers” that investors could earn by sending cash through OpenAI’s methods.
At the time, the profit limit was set at 100 times the investment amount of first-round backers. To put it simply, if an investor puts in his $1, his direct profits are limited to $100 in total, even if OpenAI makes billions of dollars in profits. It will be. You’ll still get a good profit, but it won’t be unlimited.
But remember that a nonprofit’s core mission is to manage the development of artificial general intelligence. And all investors and employees, including commercial companies, are first and foremost subject to that mission.
Yes, there are nonprofit organizations that run profitable businesses to attract top talent. How did Altman fit in here, and how was he exiled?
Sam Altman’s Lost Assets
Mr. Altman sat on the board and was OpenAI’s most prominent figure. Aside from a small investment through the YCombinator fund (of which Mr. Altman was previously president), he owns no shares in the company. And that meant he didn’t have much control if something went against him.
He even joked about this on Friday evening, saying, “If I start to fall, the OpenAI board will go after me for all of my stock.”
In fact, it is reportedly worried some investors Despite publicly declaring that he was passionate about OpenAI because he loved its work, Altman had no ownership stake in the company he helped co-found.
Most founders of late-stage companies utilize dual class share structures. Two tiers of stock are created. One is a set of shares for venture investors and the general public, if the company is successful in his IPO, and the other is a more powerful set of shares reserved for the founder or possibly large investors.
CEOs and founders use dual class share structures to prevent losing control of the company. The rights assigned to these shareholders vary, but often include huge voting rights, guaranteed board seats, or other things that make it difficult for the board to override those rights even if the company goes public. Contains governance provisions. Some companies, like Google, have three types of shares for founders, employees, and investors.
altman There was no protection for them. Brockman, the former OpenAI president, said Altman learned he had been “fired” during a virtual meeting Friday at noon. Brockman said Altman’s only caveat was a text message from OpenAI’s chief scientist Ilya Satskeva the day before on X, the social media platform formerly known as Twitter.
Investors like to back visionary founders. Some, like Peter Thiel’s Founders Fund, have made this idea central to their investment thesis. Not having capital in the company may have been seen as reducing Altman’s “skin in the game,” so to speak. But it also meant that Mr. Altman, lacking such protection, could stage a coup in the boardroom.
Five major investors at Uber, including Benchmark, one of Uber’s largest shareholders, have called for Mr. Kalanick to step down immediately after months of negative publicity regarding workplace culture and other controversies. In contrast, a similar storyline has not emerged with OpenAI. Altman is a polarizing figure, with many critics concerned about the impact OpenAI’s ultimate goal of artificial general intelligence (AGI) will have on humanity.
OpenAI’s small board lacks the experience you would expect from a company of this size and importance. Its biggest backers, including Microsoft, have no board seats. Before Altman and Brockman left, the company consisted of three independent directors and three OpenAI executives.
Mr. Brockman was not involved in Mr. Altman’s firing. In other words, all outside directors and Mr. Sutskever would have needed to vote in favor of Altman’s dismissal. With no allies on the six-person board, it was mathematically impossible for Altman to win.
It’s not clear what Altman or OpenAI will do next. Given the apparent swiftness of his resignation, a lawsuit could ensue. Some of Silicon Valley’s most influential law firms are representing OpenAI and its investors in various transactions, and the court proceedings will likely be closely monitored.
