Who’s the real winner when OpenAI becomes a public benefit corporation?

Last week, OpenAI announced that it’s giving up its plans to change up its weird corporate structure. The company’s new plan: to convert its for-profit LLC into a public benefit corporation (PBC). Let’s dive into what this means. 

Currently, a small nonprofit owns and controls the larger for-profit LLC that has been raising massive piles of cash. It’s pretty complicated, but that’s the gist of it. The structure evolved over time, and everything changed with the explosive success of ChatGPT. Now the structure is creating real problems for the kinds of huge growth that OpenAI is predicting. 

Investors are eager to see big returns on their chunks of equity, and the current “capped profit” structure doesn’t offer employees the same kind of stock-based compensation packages that their competitors can. CEO Sam Altman said it became clear that the company needed to make changes to raise the ludicrous sums of capital needed to achieve artificial general intelligence. 

In Altman’s note to employees on May 5 announcing the new plan, he wrote: 

After running into obstacles like angry lawsuits from OpenAI cofounder Elon Musk and a skeptical state attorney general, the new plan basically tweaks the existing setup, but turns the for-profit LLC into a PBC, which the nonprofit will own a big chunk of. 

Considering that OpenAI is reportedly valued at about $300 billion, this would likely make the company both the largest nonprofit and the largest PBC in the US. 

What exactly is a PBC?

Many of the largest companies in America choose to incorporate in business-friendly Delaware. According to Delaware state law, a public benefit corporation is a for-profit corporation “that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”

Let’s look at a PBC you might have heard of: eyeglass retailer Warby Parker. In addition to selling eyeglasses with names like “Bodie,” “Baird,” and “Brady,” Warby Parker runs a “Buy a pair, Give a pair” program that has given away 15 million glasses to those in need as of 2023. 

As a public benefit corporation, each year it’s obliged to issue a report detailing the good deeds that it’s been doing. The company gets to point to the PBC as proof that it is legally committed to doing some good things, and benefits from the positive PR — and some people who badly need glasses get a pair.

But the most significant difference between a PBC and a regular corporation lies in the mission of the board of directors.

“In an ordinary corporation, the legal obligation is to always put shareholders first, to always maximize wealth,” Ann Lipton, professor of business law and entrepreneurship at Tulane University Law School, told Sherwood News. 

But in a PBC, the board of directors serves a different master. Lipton said that in a PBC, “the board has a legal obligation to consider these benefits to society and its mission, in addition to considering the shareholders. And that means it does not have an obligation to always put shareholders first.”

Delaware state law says that PBC directors “shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.”

To add to the confusion, there’s also a “B Corporation” designation you might see some companies boasting about. While California’s legal PBC classification is technically called a “Benefit Corporation,” there is also a “Certified B Corporation,” which is a rigorous certification from a nonprofit organization called B Lab, which verifies companies’ commitments to transparency, accountability, and social and environmental impact. The certification needs to be renewed every three years. 

Why does OpenAI want to become a PBC?

Imagine a scenario where a newly minted OpenAI PBC is approached with an unsolicited offer to buy the company from some theoretical larger, older technology company whose name rhymes with “Smycrosoft.” OpenAI’s board of directors would have to balance the potential effect of such a purchase on society against the interests of the investors. This could theoretically give OpenAI PBC some wiggle room to fend off a takeover. 

Such a scenario could lead to some big, powerful shareholders (like Microsoft, Nvidia, and SoftBank) being very unhappy.

Lipton said, “[The directors] don’t always have to go for the public benefit mission. They can choose to advance shareholders’ interests, but they’re supposed to balance them. And they can choose to further the mission even when it would harm shareholders.”

While this sounds like a clever strategy, Lipton said OpenAI’s switch from a for-profit LLC to a PBC is likely more about just becoming a corporation and less about the public benefit part. As an LLC, “there are no fiduciary obligations of any kind on the part of the people who run it,” as there are in a corporation, Lipton said. And this was creating obstacles for future investors as well as retaining and recruiting talent.

“The company cannot continue to get investment unless it’s going to show a hefty return. That remains true no matter what form they pick,” Lipton said. 

“Unbelievably weak” enforcement

While OpenAI might get a PR boost for the PBC designation, it may not mean much practically. Lipton said that the enforcement mechanism to ensure a company complies with its mission statement is “unbelievably weak.”

“So what it comes down to is its public relations. What’s going to dictate [the company’s] behavior is ultimately whether they can get investment doing what they’re doing,” Lipton said.

OpenAI did not respond to a request for comment.