Preliminary Microsoft-OpenAI deal clears way for OpenAI's for-profit conversion

The nonprofit could hold a stake worth over $100 billion if OpenAI reaches a $500 billion valuation in private markets

by · TechSpot

Serving tech enthusiasts for over 25 years.
TechSpot means tech analysis and advice you can trust.

What just happened? Microsoft and OpenAI have reached an agreement to extend their high-profile partnership, resolving months of strained negotiations and clearing the way for the artificial intelligence startup to move forward with its plan to form a for-profit corporation. The non-binding deal represents a potential turning point in one of the most closely watched relationships in the AI sector, though many of the terms have yet to be finalized.

The new arrangement comes after a summer of contentious talks between the two companies, which have long been both collaborators and competitors in the race to develop advanced AI systems.

Microsoft, an early investor in OpenAI, has committed more than $10 billion to the startup since 2019 and has integrated its models into products such as Office, GitHub, and its Copilot chatbot. At the same time, it has insisted on exclusive access to OpenAI's technology for its Azure cloud platform, giving it significant leverage in negotiations.

OpenAI reportedly considered approaching antitrust regulators to loosen the contract's restrictions, a source told The Wall Street Journal. The preliminary deal removes a key obstacle to the company's restructuring effort, though the exact scope of Microsoft's ongoing control was not disclosed. Disputes over cloud access and intellectual property rights complicated the talks.

According to a person familiar with the matter, OpenAI sought the ability to sell its products through other providers, while Microsoft pushed to maintain first rights to the startup's most advanced systems. At one point, the two sides even clashed over the definition of "artificial general intelligence," with Microsoft proposing a higher threshold – "artificial superintelligence" – as the benchmark for ending certain exclusivity rights.

OpenAI is now in the final stages of setting up a for-profit company under a structure that preserves control by its existing nonprofit board. Under the proposed terms, the nonprofit will hold a stake valued at more than $100 billion if OpenAI reaches its targeted $500 billion valuation in private markets. That endowment could make the OpenAI nonprofit one of the largest philanthropic entities in the world, though questions remain about when and how those funds could be deployed.

As part of the restructuring, Microsoft and the nonprofit board are expected to each hold stakes of roughly 30 percent, with employees and private investors owning the remainder, according to sources familiar with the deal. Investors have been told that the new corporate structure will be completed by the end of the year to avoid jeopardizing up to $19 billion in pledged funding.

// Related Stories

The plan faces regulatory scrutiny. Attorneys general in California and Delaware are reviewing whether OpenAI's conversion complies with charitable law. The proposal has also drawn criticism from a range of opponents, including Elon Musk (who is suing the company) as well as advocacy groups and rival tech firms such as Meta Platforms.

The deal comes as Microsoft rebalances its reliance on OpenAI. While the company still plans to use OpenAI's models as its primary AI engine, it has also sought alternatives. Microsoft recently finalized a deal with Anthropic to integrate its AI systems within the 365 suite, in addition to incorporating those models into GitHub. Its cloud platform has also begun hosting systems developed by Musk's xAI.

The diversification reflects Microsoft's concerns about OpenAI's stability. After Sam Altman, OpenAI's chief executive, was briefly dismissed in late 2023, Microsoft CEO Satya Nadella launched a competing in-house AI lab and scaled back the massive OpenAI-linked data center project code-named Stargate.

Since then, OpenAI has shown increased reluctance to share its latest research with Microsoft, straining a partnership that was once considered mutually dependent.