OpenAI's For Profit Structure Adds Valuation Complexity to Microsoft And Other Equity Investors: Report

OpenAI and Microsoft Corp MSFT are entering high-stakes negotiations to determine converting Microsoft’s $14 billion investment in OpenAI into equity in the AI company.

OpenAI, the creator of ChatGPT, recently closed a funding round that valued the company at $157 billion, which adds complexity to the discussions around equity distribution.

The negotiations marked a significant shift as OpenAI transitioned from its original nonprofit structure to a for-profit corporation, the Wall Street Journal reports.  

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OpenAI and Microsoft are facing tensions in their partnership due to financial strain and rising expenses at OpenAI. OpenAI, expecting a $5 billion loss this year, has asked Microsoft for additional funding and computing power, but Microsoft has been hesitant after OpenAI’s leadership changes. This has strained the relationship between the two companies, the New York Times reports.

OpenAI is grappling with soaring costs and pressure to find more affordable computing options, while Microsoft is concerned about its dependence on OpenAI’s AI technologies.

As both companies renegotiate terms, OpenAI’s projected computing expenses are expected to rise significantly, potentially reaching $37.5 billion annually by 2029.

Microsoft, OpenAI’s largest investor, stands to gain a substantial stake in one of the most valuable AI startups in the US.

According to WSJ, both companies have hired major financial advisors to assist in the negotiations. Microsoft works with Morgan Stanley MS, while OpenAI has brought in Goldman Sachs GS.

Microsoft, early investors like Khosla Ventures, and OpenAI employees have rights to future profits from the for-profit entity. However, their returns are capped. This means Microsoft needs to recoup its $13.75 billion investment before seeing profit returns, the WSJ report said.

OpenAI, whose monthly revenue hit $300 million in August, proposed increasing the chatbot’s price by 10% in 2024 and doubling it to $44 over the next five years as it gains traction.

The ChatGPT parent’s revenue in August more than tripled from the previous year, with 350 million monthly users as of June.

OpenAI’s new AI-powered search engine, SearchGPT, aims to compete with Alphabet Inc’s GOOG GOOGL Google, challenging its long-standing search market dominance.

Price Action: MSFT stock is up 0.24% at $417.72 at the last check Friday.

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