The quest to keep OpenAI honest

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Hey everyone, welcome to Decoder. I'm Alex Heath, Deputy Editor at The Verge and your Thursday episode guest host. We've covered OpenAI in several ways this summer. from how it's navigating the AI talent wars to how people are starting to feel attached to ChatGPT. Next week, we're airing a recent conversation I had with Brett Taylor, the chairman of OpenAI's board.

But today, I want to zoom in on the battle that's brewing about the future of OpenAI itself. Despite being one of the most valuable companies in the world, OpenAI is still technically a non-profit. That structure was designed back in 2015 to keep investors from steering artificial intelligence in ways that could harm humanity. It's also what set the stage for the dramatic board coup in 2023 that briefly ousted Sam Altman as CEO.

And now, OpenAI is trying to shake this nonprofit structure so that it can raise even more money and eventually go public. There's a lot at stake here, and not just for OpenAI. To unpack why it matters, today I'm joined by Catherine Bracey, CEO of TechEquity, and Orson Aylad, CEO of Latino Prosperity. They help run Eyes on OpenAI, a coalition of advocacy groups that's challenging OpenAI's attempted restructuring.

As you'll hear, Catherine and Orson argue that OpenAI has enjoyed the advantages of being a non-profit while drifting away from its mission. It's a complicated, fascinating story that cuts to the heart of how the most important AI company in the world is structured and the impacts of that structure. Here, I should note that OpenAI declined to comment on this episode specifically.

Instead, I was referred to a May blog post from Sam Altman in which he wrote that the company's proposed restructuring will still create the, quote, largest and most effective nonprofit in history. Okay, here's my conversation with Catherine Bracey and Orson Aylad from Eyes on OpenAI.

Catherine and Orson, I'm so excited to have you both on because I think this is an important topic that more people should actually understand. And they may in the coming months as this all comes to a head. That said, no one from OpenAI is here in this conversation. So I also kind of want to play devil's advocate here a little bit. And so my first question for both of you is simply, why should we care?

about OpenAI's nonprofit status? Why does it matter? I think it might be helpful for your listeners to just be reminded of OpenAI's history and why it was founded, which is important to... understand the governance structure. It was founded in order to ensure that this technology that its founders believed was imminent. was going to benefit humanity and not undermine it. They had a strong understanding of the potential risks of AGI, and they wanted to build something that could harness that.

technology for good. And that was a lofty mission. And I think a lot of us at the time were very supportive of it. They structured themselves as a nonprofit explicitly to protect. that technology and that mission from the imposition of investors onto the technology. And I thought this was very telling. I just wrote a book about venture capital and interviewed Sam Altman for the book and wanted to understand his thinking behind

setting OpenAI up as a nonprofit. I didn't know that he would be so explicit about doing so because he wanted to protect it from investors. But that's exactly what he told me that he knew. And he knew very well because he was running Y Combinator at the time. He knew what investors would ask of this technology. He knew that those asks would create risks.

for AGI to not achieve the mission of benefiting all of humanity, but instead be focused on profit and in the focus on profits, create a lot of risks for humanity in the process. So the nonprofit structure was... explicitly meant to protect society and i think the fact that since i've had that conversation with sam they've taken a turn away from that mission and that structure

to protect the technology and protect the mission is worrying. And so Orson and I and a coalition of other organizations are trying to make sure that at least the mission itself is protected, if not the governance structure.

Talk about this coalition and who makes it up. What is its mission? How did it come together? This coalition came about, you know, we were all reading the same. articles were open and I wanted to basically abandon its nonprofit roots and go fully private. Many of us were concerned. One opening eye clearly is developing technology that will have severe consequences for society and will impact a lot of things. But we were looking at it mostly from a charitable asset law.

where we knew that there was precedent saying that if you do convert to a for-profit and abandon your nonprofit roots, then you have to leave behind your public assets, your charitable assets, which at the time... that we came together were valued roughly around 100 billion today it's about could be 500 billion so the coalition came together various non-profit organizations economic

organizations, social justice organizations, educational organizations and also some labor organizations. And so today it's a coalition of over 60 organizations that continues. to press the Attorney General in California who can oversee charitable mission and charitable law to ensure that OpenAI truly acts as a nonprofit and that they truly stick to their mission statement.

For those who don't understand how this all works, can you give us a sense of the legal and monetary benefits that OpenAI has enjoyed so far as a nonprofit? And also, are there restrictions? legally that it operates under being a nonprofit. Neither one of us is a lawyer, so should make that caveat here. But both of us are founders of nonprofits and have.

boards and lawyers ourselves that tell us what we can and can't do. So I mean, I think we can speak to it from that perspective. Obviously, any nonprofit can take donations tax free to the donor. And nonprofits also don't have to pay taxes. And then they operate under a set of rules that in exchange for that tax-exempt status, they must do things that are in service of a public mission and not to benefit.

a private profit motive. There's a variety of different ways that can look conflicts of interest in private environment and other things. But essentially, OpenAI, starting as a research lab,

created this mission. And I think as part of this mission, which made sense at the time, they were going to build this technology that could be in service to humanity. Over the course of time, crept away from that mission and i think at a certain point became for all intents and purposes a for-profit startup that was competing with other for-profit companies that were building similar technology, and they were able to do so under a non-profit banner with all of those tax benefits in place.

This is wild to me. So are you saying that, and I think just people need to understand this if this is true, that OpenAI, the hottest tech company in the world, that's about to be the most valuable private company in the world at $500 billion potentially in the coming months. Is taxed exempt? The nonprofit entity is taxed. The nonprofit entity. Okay. Yeah. How much money they're running through the nonprofit. I don't think anybody's out now donating money to the nonprofit and, you know, getting.

a tax benefit on that donation. But again, not a lawyer. It's difficult because if you look at their structure today, they're interconnected with a variety of LLCs, strong connection to Microsoft. What we do know is that the nonprofit status implies a strong legal and an ethical obligation to put the public interest ahead of shareholder returns. That's what we want. That mission gets diluted.

If they override that mission by private motives and they shift towards maximizing revenue instead of maximizing public good, then you're in violation of your nonprofit charter. Both run nonprofits. We can't get rich of our nonprofits. We are highly regulated as nonprofits. We have to put together reports, audits that are available to the public. The same thing applies for OpenAI.

And we just feel that they are operating with an enormous amount of secrecy and that they're putting together the profit motives ahead of mission. It's a little bit of a charade to say that they are operating as a nonprofit in the same way that like a traditional charity. This idea that they should receive the same benefits that like a soup kitchen receives is kind of ludicrous at this point. And, you know, if I was competitor to open AI and I was having to follow a set of governance laws.

that applied to for-profit companies and OpenAI didn't, then I don't know, that would make me kind of upset. So I just think it's time to... throw off that charade and stop allowing them to use this nonprofit banner. In their interest, they want all the benefits of a nonprofit status without any of the responsibility. And I think that's wrong. We have to take a short break. We'll be back in just a minute. Support for this show comes from LinkedIn.

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I'm glad you brought up competitors. Competitors have actually weighed in on this issue. Meta, for example, sent a letter to the California AG's office about this. And they made the specific argument that OpenAI, quote, should not be allowed to flout the law by taking and reappropriating assets billed as a charity. and using them for potentially enormous private gains. And it also made the point that this would be a, quote, seismic thing for Silicon Valley.

And would essentially allow a path for other companies to do the same thing, for them to start as a nonprofit with tax-exempt status and then switch later on when they decide they want to start making money. What do you guys think the second order effects are if open AI gets its way here ultimately and gets to pull this off? Maybe they pay.

a fine, back taxes, or they have to give more of their assets to the charity than they want. But essentially they get through all this because the train has left the station. What are the effects on other companies? You both run nonprofits. What are the effects on other nonprofits? The reason the law exists in the way that it exists is to prevent companies from.

doing exactly this. I mean, it is legal. If they want to transition to a for-profit, they can, but they cannot take the assets that they built as a nonprofit with them as they do so. I suspect that they had a conversation with the attorney general about this transition and were told, I mean, I don't know, but, you know, they were told that they would have to leave a certain amount of those assets behind if they decided to make this transition. And they have since decided that.

in fact no they're not they're going to maintain that their current status as sort of a Potemkin nonprofit that oversees the for-profit and at the same time remove the profit caps on investors and let investors do whatever they want and take the company public. And that's the kind of thing that I think is not acceptable. If they were just transitioning to a for-profit and leaving the assets behind in the charitable sector, then that would be fine. I would totally support them leaving.

By trying to take the money with them, they are making a mockery of the rule of law, which I think is one of the impacts it would have on California and the entrepreneurial environment and mocking.

It's competitors creating a permission structure by which any startup could try and do the same thing. If they are allowed to do this with no consequence, no real consequence, then... it will provide the blueprint for other companies to do the same thing and the ag won't really have as much you know moral authority to stop that from happening if i can add i i highly doubt that the ag would

let them go on just because they might feel as though the train has left the station just because of the issues that Catherine raised, the precedents. the appearance of public interest governments to attract goodwill and resources and then just abandoning those. If they get the green light, I can't imagine how many other nonprofits would try to do the same thing.

So because of that, I do think that the AEG would sue them. And we would, of course, urge the AEG, who served the people of California, to sue because of the precedent that this sets. At the same time, I think you both can appreciate that for them to theoretically leave charitable assets behind, I mean, that's essentially the whole company. I mean, what else is there? They've become the ChatGPT.

developer platform company, the charity as it exists is really nothing. I mean, the charity entity, I'm not sure what it does. The last time I saw the IRS report on it, it had... negligible assets. It was like maybe tens of millions, whereas the rest of OpenAI is worth hundreds of billions. So for them to...

like you were saying, Catherine, properly leave behind the charitable assets, they have to basically start over from scratch. Is that what you guys are asking them to do? Legally, that is what the law says. I think the AG has some latitude on...

what kind of settlement he could negotiate with them. I think he does have to balance the interests of maintaining California's position as a place where innovation can happen and also the public interest. It is true that these assets were created with the support of the people of California. And the law says that if you make this transition, you have to leave behind.

And so those assets, some significant number of those assets should remain in the public interest so that they can be used to advance the mission of AI benefiting all of humanity. And practically, this looks like the assets are. shares of open AI, like it's just straight money. I'm being kind of silly here, but it's not like the people of California will all of a sudden get governance over like chat GPT usage in California, right? We're talking about financial assets.

Can I clarify one of the things that we are pushing for is, you know, essentially OpenAI has two functions as a nonprofit. One is to adhere it to its mission and that. means safeguards to ensure that AI is used for the benefit of humanity. So there's the governance piece there that we think still should continue. And there's a second piece, which is the distribution of assets.

which they mentioned also in their mission statement. What we're arguing is that they continue to govern with that mission in mind because they have to. They've decided that they want to stay a nonprofit, but that the distribution of assets be free of conflict. and that those assets be spun off to an independent entity. Nobody here thinks that that independent entity should receive the full $500 billion. I think right now that...

AG of Delaware and the AG of California are trying to value what the assets might be. But our goal is that there continue to be strong governance so that OpenAI adheres to safeguards some of the things we really need. in the AI sector, but then that we have an independent entity that is fairly valued and perhaps over time funded, right? It can remain connected to the OpenAI so that there are a lot of talks of OpenAI going public one day.

This independent nonprofit could get shares of that. So we are asking for two things, the ongoing governance and an independent entity that will oversee the distribution of assets.

Let's talk about the governance piece and the mission statement a little bit more because I think the first time – A lot of people probably realized that OpenAI was still controlled by a nonprofit was when its CEO, Sam Altman, was briefly fired by the board of directors in 2023. This ruined my week. I reported on this extensively. Very dramatic. RIP your Thanksgiving. Exactly. And.

That board, that same board, it's not the same. It's almost completely changed over. But legally, that same board still controls the company to this day because OpenAI, despite the headlines and a lot of people probably think OpenAI has not been a nonprofit. for the last while, it still is legally a nonprofit because it hasn't done this transition. So it's the same governance structure as what it had fundamentally when Sam was fired in 2023. There's a scene from that.

that board coop that I remember vividly where a bunch of open AI execs got in a room at headquarters and they got on the phone with the group of board members who fired Sam. And I'm paraphrasing, but at one point, one of the execs said something like, what you're doing is killing the company. You know, open eye will go to zero if you follow through with this and you don't bring Sam back. And one of the board members on the other end of the call said.

That would be perfectly in line with the mission that we have as the board. And everyone that worked at OpenAI, the quote-unquote for-profit company, was just aghast at this. Because it is a crazy thing. Because OpenAI at that time was already a super... commercial entity. It was resetting the tech industry fundamentally in the AI race. And so to hear that, wait, like we're controlled by this board that the interest of the board.

could mean that the company shuts down. It's a very strange concept, and I'm wanting to double-click on that with you guys. What exactly is the governance role of the board as it exists today, and what does that mean? It means they can just shut the company down? You say they are still legally a nonprofit. I would say they're actually a nonprofit on paper, but we don't think that they are operating legally, which is sort of the point you were making. And in order for them.

To be operating legally as a nonprofit, yes, the board... It's only commitment, it's only fiduciary responsibility is to the mission of the organization. My sense from OpenAI is that they don't understand their responsibility to the mission. They do treat this like a for-profit company.

have sort of diluted themselves into thinking that by building the most powerful, valuable for-profit entity that is ultimately in service to the nonprofit because it will deliver more financial benefits to the nonprofit that it could then do something with to further the mission. And that's actually not the point at all. I mean, as a nonprofit leader myself, my responsibility is to turn down money.

if it is going to affect my ability to execute against the mission. And it is the board's legal responsibility to provide oversight to ensure that I do that as the CEO. So there is no world in which maximizing the profit of... of this company for shareholders, for employees, for whoever, is always aligned with the mission of the nonprofit. And when the mission diverges from the profit motivation, the mission has to always override.

even if that means taking the company to zero. And if they can't live with that, that's totally fine. They should spin off the for-profit and leave a significant set of assets in the charitable sector. That's all we're asking them to do. It's not really clear why they refuse to do so. And we should just be clear that the nonprofit mission is to develop AGI that benefits all of humanity. I have a lot of problems with that because it's...

inherently very squishy and can be defined however you want. What does benefiting mean in that context? What is all of humanity? But yeah, maybe we can talk about that. Like, does the mission need to change for the nonprofit? Is it too vague? Because at the time in 2023, when Sam was fired, that board decided that firing Sam was in the benefit of...

AGI for all of humanity. But, you know, it's hard to get there perhaps now. It's hard to see exactly how you execute that day to day, I guess. We haven't weighed in much on the specifics of the mission. I think what's important is the governance and the practice align with their current mission. I think their current mission is fine. What's not fine is the conflicts of interest that we see. You asked earlier, what is the...

we're doing now? I think that's the biggest question. We're not sure who's really in charge here, right? Is it Microsoft? Is it investors? Is it employees? It appears. employees were given shares. Current and former employees were given shares of this company. Of course, they don't want to see their nonprofit go down because their shares would go down.

Big reason why there's a huge conflict here is because when you're giving shares to your employees, we know that they're not going to be in service to the mission. They're going to be in service to wanting to get paid, right? It's the tech mentality. the startup mentality and it seems like they built it that way so i think that the mission we can live with what we just need more answers is on the governance and the practices that align with the mission

One set of people we haven't talked about yet very much are the investors. And I just cannot reconcile this current proposed structure that they... want to live under, maintaining the nonprofit ownership of the for-profit, but converting the for-profit into a basically a no different from a normal startup where shareholders can have equity stakes. Sam Altman presumably can have equity stakes. The employees can have equity stakes that they can eventually go public.

And that SoftBank and, you know, Thrive are going to be okay with the nonprofit board. being able to drive the company to zero. I'm sure there was a conversation at some point before the $40 billion funding round where they said, we're not going to do this unless you can... guarantee that the nonprofit does not have the control to do that. And I suspect they were told that, yeah, we would make sure that the nonprofit didn't have control. And so they tried to spin out.

into their own entity. I think the major question is... why they decided to stop going that route and to maintain their current structure with the nonprofit ownership and what assurances they've given to those investors that make them okay. with maintaining the nonprofit ownership of the for-profit company. It doesn't make any sense that they would be if the nonprofit is still in a position.

to put the priority of the mission above the profit priority. So do they have some agreement between the shareholders and the company that the nonprofit only has? control on paper and will not ever challenge the for-profit. These are questions that have not been answered. And I think that, you know, their decision not to actually spin out the for-profit into its own standalone entity.

raises more questions than it answers. And so that's why we are still asking the AG to investigate. We met with OpenAI's team shortly after the decision where they retreated for profit. Not only would they not answer questions, but they said they didn't have the answers to a lot of the questions. So to Catherine's point, it seems like something happened and they retreated quickly without truly knowing how this was going to play out. We have to take another quick break we'll be right back.

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And we're back because this is just very complex. I want to explain to the listener how this for-profit subsidiary works. So we should explain why they created this in the first place, which is that they needed a way to raise money. And they couldn't do it feasibly through the nonprofit. They needed to raise billions of dollars for compute, but they have caps. It's like a hundred X roughly cap to align with the nonprofit mission that an investor can make.

in its investment. And the website for OpenAI used to say like all investors should treat this as a donation. We're not even legally obligated like a normal for-profit company to ensure or work in our best interest to make a return on your investment. But they did that. And so there's this cap. They want to remove the cap so that more investors can come in, put billions more in, and then eventually they can IPO with a potentially unlimited upside as well. And to do that.

They've been trying to get rid of the nonprofit. And what happened in the last couple of months, which we've been talking about, is that basically they realized they couldn't do that, that there was too much opposition, I think, from your coalition. They created their own commission to look into this and their own commission said that the nonprofit needed to stay in control.

OpenAI. So that's why they, I think, decided to keep the nonprofit in play as they realized there was going to be no legal path forward to fully getting rid of it. But yeah, I also have the questions you have, Catherine. I don't really understand how they can have it both ways. How can you have a nonprofit board still in quote unquote control when it really is just sitting over to the side with a bunch of shares that it got from this conversion?

Just to be clear, their commission, the nonprofit commission that made the recommendation around independent governance, happened after. That report came out after they made this decision. In terms of the sequence of events, and I would say it's not accurate to say that they can't transition. They can absolutely transition to a for-profit, and there is precedent.

Proposal that we're making to the AG is actually built on the precedent of healthcare companies in the 90s that transitioned from nonprofits to for-profits. And when they made that transition, they negotiated. with the AG to leave a certain amount of their assets behind. They have now gone on to be very successful for-profit healthcare companies, and they endowed a couple of foundations in California, the California Wellness Foundation, the California Endowment.

and I think the California Healthcare Foundation, that now... maintain the mission and distribute those benefits to support the health of Californians. And so it's perfectly possible there is legal precedent for them to spin off and go about their for-profit business. And that's the path they were on. The question is, why did they decide to forego that path and try to now, as they are saying, maintain this nonprofit ownership structure, which, as we've discussed.

isn't viable in the long term you cannot reconcile the non-profit and the shareholders imperatives so That's the question they haven't answered. They also apparently have not worked out a deal with Microsoft. Microsoft did not know about this before they made the announcement that, in fact, they were going to maintain their nonprofit status. It is very fishy.

that they were on a path to doing what was very clearly the legal thing to do. And then all of a sudden they decided not to do that and have created what I think is a bigger mess for themselves and trying to like. say that this nonprofit has some meaningful control over the for-profit. So, you know, until they answer that question, I think it's right for people to be suspicious of what's going on here.

And just so people understand what you're saying about Microsoft, Microsoft is obviously OpenAI's largest shareholder. What's essentially happening with this nonprofit conversion is the dividing of the pie. All the investors are realizing that. The division of the pie is about to change because OpenAI is about to have to leave behind at least some significant chunk, TBD on what size of the chunk of the equity value in the for-profit subsidiary.

They have to leave it behind with the nonprofit to complete this conversion that they want to do, which is not the original one they wanted to do, but it's still going to convert them into a uncapped commercial entity. And now that leaves Microsoft going, wait, well, how much are we going to get? How much do we have to dilute ourselves? How much do other investors have to dilute themselves?

And if OpenAI were making billions of dollars in profit, I'm actually not sure this would be such an interesting story. The reason to me this is so interesting is because OpenAI is doing a very high wire. Blitzkrieg run. on the tech industry and raising billions of dollars and immediately pouring those billions of dollars back into more training, more compute, hiring more researchers. They're not profitable and they actually don't plan to be profitable anytime soon.

kind of major financial hiccup on the way where all of a sudden they have to pay a ton of money or leave a bunch of equity behind could actually make them stumble in a way that I don't think people fully appreciate, just considering open eyes seem so. send it and so untouchable. And it is huge, but financially it's not profitable. And so all of this really matters because it's not like they can just afford to pay off the state of California billions of dollars. Do you all agree with that?

I do agree. For OpenAI, it was their decision to be a nonprofit. It was part of Sam Altman's vision. I do think that it has created problems for them. That's their making. They're a non-profit. It's up to us to ensure they act as a non-profit. But I do think that they have a unique structure that they want to just go on and race ahead and beat the competition.

It's different for them because of the things that they've said and the things that they've committed to. So what do you guys want to see happen next? We've talked about governance. The board control sounds like a key piece.

They still haven't committed to the size of the equity that they're going to leave behind for the nonprofit. Obviously, that matters. Yeah, we're waiting for the attorney general. We're continuing to meet with the attorney general to see where they're going up to now. They say very little, but... We do have to see more specifics around the governance piece that we've raised, right? How are they going to remove all the conflicts of interest? Are they going to put together?

strong whistleblower laws to ensure that the company truly is mission driven or not for profit driven and then on the other end we want to ensure that there's a independent entity that is free from the conflict, free to pursue the mission that is fairly valued and can be set up similar to the previous foundations that Catherine mentioned, the California Endowment, Wellness.

But the biggest signal that we're waiting for now is from the AG. They have to complete their investigation and they have to put together, they have to show the specifics to the public. This is the deal behind closed doors. I think it would just be a huge setback for nonprofit integrity in the state. And so we truly believe that the AG will do the right thing, be transparent, show us what the investigation yields.

protect nonprofit integrity in California. We've been talking a lot about the business of this, the industry stuff. It's a very heady, complex topic that people in tech and AI will obviously find interesting. But I think... What I'm still trying to understand, I think, from the both of you is what is it that everyday people should...

care about on this topic. You're talking about the integrity of like how nonprofits work in this country. Obviously that matters. But if you're just an everyday person who maybe uses ChatGPT or doesn't, why does this matter? Isn't this just more just...

corporate drama this is a conversation we're having about one company and its governance structure but it is ramifications for the entire ai industry and open ai kind of set itself up as a nonprofit that was going to set an industry-wide standard for this technology before there was an industry. When they released ChatGPT, they became just another player in that industry. And I don't blame them for this. They have to compete with Anthropic and Google and Meta and all the other model builders.

That means that their nonprofit is hamstrung. It can't really do the work of advancing its mission because it is so tied to the fate of this one player in the industry. What would be possible if the AG did what we're asking him to do and there was a spin-out organization or set of organizations that had control of a significant amount of assets to ensure that AGI was benefiting all of humanity? they could do work that would

across the industry. It wouldn't just be about open AI. It would be about making sure that the entire industry was responsive to the public. It could fund advocacy. It could fund public option for compute. It could fund... research that would happen at universities and not in private labs that are only owned by shareholders. It could fund workforce training. It could fund education. It could fund all of these things that currently the state is just not in a position.

to fund, and that would benefit everybody, the public, to take advantage of this new technology. And hopefully that would ensure that AI was being used as a benefit and being used by us and not on us. And that would affect all of the companies who are operating this space, not just apply to open AI in a vacuum. People are watching this because they know that AI is going to have huge ramifications on society.

And where OpenAI goes, the industry could follow. We should make sure that the benefit to the public truly comes out forward on this. And it would be a shame if we lost the benefit to the community on this. I'd like to thank Catherine and Orson for taking the time to speak with me and thank you for tuning in. If you'd like to let us know what you thought about this show or what else you'd like us to cover, drop us a line.

You can email us at decoder at the verge.com. The team really does read every email. We also have a tick tock and an Instagram. Check those out at decoder pod. And if you like decoder, please share it with your friends and subscribe wherever you get your podcasts. Decoder is a production of The Verge and is part of the Vox Media Podcast Network. Our producers are Kate Cox and Nick Stat. Our editor is Ursa Wright. The Decoder music is by Breakmaster Cylinder. See you next time.

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