Why Elon Musk offered to buy the OpenAI nonprofit

It’s been a busy week for Elon Musk. He says he’s saving taxpayers billions of dollars (though outlays from the Treasury Department are public and make it pretty clear he hasn’t); he bragged that he fed USAID “into the woodchipper,” an aide on his Department of Government Efficiency was revealed to have said this summer to “normalize Indian hate,” resigned, and was then rehired.

So you’d be forgiven for having missed, amid all the chaos, Musk’s $97 billion offer to purchase “all assets of OpenAI Inc.,” especially since OpenAI CEO Sam Altman immediately and emphatically rejected it.

But as we all learned from the Twitter saga, it pays to take Musk’s takeover bids seriously — and while this one almost certainly won’t happen, it may still have big implications for perhaps the most important company in artificial intelligence.

To make sense of Musk’s out-of-nowhere bid for OpenAI, you need some background on OpenAI’s controversial conversion from a nonprofit to a for-profit company.

OpenAI was initially founded as a nonprofit, with the mission to “ensure that artificial general intelligence benefits all of humanity.” But, the company came to argue, it became increasingly clear that to make powerful AI — and OpenAI has set its sights high, wanting to develop “superintelligence”’ that can surpass humans in every way — you needed to raise mindboggling sums from investors. And these investors absolutely wanted a healthy return on their investment.

So OpenAI transitioned first to a hybrid model, a “capped profit” system where investors could earn up to 100x their initial investment back, but any returns past that would be the nonprofit’s for the benefit of humanity. The nonprofit board, under this model, still retained ultimate control over the company.

But that ultimately put the nonprofit board at odds with Altman: In a messy conflict in November 2023, the board fired Altman for lying to them, which led to employees threatening to resign en masse, and Altman returning, with much of the board resigning. The conflict left investors nervous, and in the next round of investment they reportedly demanded an end to OpenAI’s unusual status.

But it is not straightforward to transition a nonprofit to a for-profit company. Effectively, according to nonprofit law experts I spoke with while reporting on this in the fall, a new for-profit company — the public benefit corporation OpenAI has said it intends to become — will have to purchase from the nonprofit all of the rights and assets that the nonprofit currently owns. Such a deal would come with control of the company, as well as all returns over the 100x cap that was negotiated with earlier investors.

The problem is that these assets are extremely difficult to value. If OpenAI really builds superintelligence, the returns over the 100x cap may be extraordinarily high — while if they become just another low-margin product company, those returns may well be zero. And, of course, how you value “control over OpenAI” depends in large part on just how big the returns prove to be.

This question of valuation matters because the nonprofit’s board has a fiduciary duty to do what is best for the nonprofit mission in negotiations with the for-profit entity, which one would assume would mean driving as high a price as possible.

But for months, questions have been swirling about whether the board is really in a position to do that. The board members who clashed with Altman were forced out, and now Altman himself is on the board. That means he’s in a position of selling rights to the company he’s CEO of — a conflict of interest no one has been quite willing to call him out on.

From the beginning, Elon Musk has been skeptical of the OpenAI transition to a for-profit company. Musk, who co-founded OpenAI but left after a leadership dispute, has painted the for-profit transition as a naked power grab, arguing in a lawsuit that Altman and his associates “systematically drained the non-profit of its valuable technology and personnel” in a scheme to get rich off a company that had been founded as a charity. (OpenAI has moved to dismiss Musk’s lawsuit, arguing that it is an “increasingly blusterous campaign to harass OpenAI for his own competitive advantage.” Musk owns a competitor, X.ai.)

Musk’s new takeover offer will substantially complicate any plans for the for-profit entity to purchase OpenAI’s assets from the nonprofit entity for $40 billion, or any price in that range. As I discussed above, it’s inherently speculative to come to an appropriate valuation of those assets, given how uncertain the future of AI is.

But if I were a court of law considering whether the nonprofit board fulfilled their fiduciary duty, I’d find it hard to believe that the appropriate valuation of those assets was $40 billion when someone else offered to pay nearly $100 billion for them. By making the offer, Musk makes it obvious that OpenAI was dramatically undervaluing these assets — and draws attention to the fact that Altman, in his capacity as a board member of the nonprofit, is helping to negotiate the sale of all the nonprofit’s assets to Altman, in his capacity as the CEO of the for-profit, all at what now appears to be a fire-sale price.

OpenAI did not reply to a request for comment on Musk’s bid for the nonprofit’s assets. Musk’s lawyers said in a filing on Wednesday that he would abandon his offer if OpenAI agreed to stop its for-profit conversion. “Otherwise,” they said in the filing, “the charity must be compensated by what an arms-length buyer will pay for its assets.” (Disclosure: Vox Media is one of several publishers that has signed partnership agreements with OpenAI. Our reporting remains editorially independent.)

The state attorney general in either Delaware (where OpenAI is registered) or California (where OpenAI operates) could step in on behalf of the taxpayers if they think that the OpenAI conversion isn’t being handled in accordance with the obligations of the board. And while I am as exasperated as anyone with Musk’s bluster and find it hard at this point to ascribe him good faith, I think that his $97 billion offer is a public service, by making it very clear how much OpenAI is undervaluing its nonprofit.

If the nonprofit to for-profit conversion is to happen, it should happen at a fair market price. $97 billion is much closer to that than $40 billion. The way OpenAI has approached the valuation of the nonprofit is a real problem, and Musk’s “bid,” however trolly it might appear, could shine a light on it in the way only an ultrabillionaire can.