Sorting Out Elon Musk’s Controversial Offer of $97.4 Billion for OpenAI

Garrison Lovely has an interesting synopsis of what’s going on.

In my previous post I asked: Why Would Musk Offer $97.4 Billion for OpenAI, Just to Make it Free?

Let’s review Musk’s nearly $100 billion offer. Does it make any sense?

Garrison Lovely Chimes In

• OpenAI is attempting to transition to a for profit public benefit corporation. To do so, it needs to take control from the nonprofit board, which needs to be compensated at fair market value. OAI was maybe going to pay <$40B. Musk just made that a lot more complicated!
• If OAI doesn’t complete its for profit transition in <2 years, investors in the October round can ask for their money back. It’s really hard to price the control the nonprofit board (ostensibly) has over OpenAI. The “control premium” is typically 20-30% of the company’s value.
• But it can be as high as 70%. If OAI gets valued at $300B because of the SoftBank investment, that would come out to $60-210B. Some argued that you should think of what a rival like Google would be willing to pay for control of OpenAI.
• Well Elon just put an actual price on that. A number of different govt parties can block the OpenAI transition (e.g. CA and Delaware Attorneys General). Probably the biggest factor in that would be how much OpenAI pays the nonprofit to give up control.
• Some legal experts I’ve spoken with even argue that it may be impossible to fairly price this level of control, since if AGI is developed, it could be worth almost infinite amounts of money — or cause human extinction.
• The $97.4B bid from Musk’s group has another interesting wrinkle: they’re promising to match or exceed any higher bids. This suggests Musk thinks OpenAI’s nonprofit board might try to entertain other offers.
• This is particularly thorny because OpenAI’s nonprofit board has a fiduciary duty to “humanity” rather than to investors or employees. Some argue this means they legally can’t give up control at any price.
• Whatever happens next, this massively complicates OpenAI’s attempt to shed its nonprofit structure. The nonprofit board now has to explain why they’d accept less than $97.4B — especially with a promise to match higher bids.
• I almost forgot something else the nonprofit has: all profits above the various profit caps. In the case that OpenAI actually does what it says it wants to do, this could be worth A LOT. Part of the restructuring is reported to include removal of these caps.

Here is the Garrison Lovely @GarrisonLovely thread.

That is a well-reasoned thread.

Thanks Garrison!

He linked to the Wall Street Journal article Musk’s $97.4 Billion OpenAI Bid Piles Pressure on Sam Altman That’s a free link.

Musk’s $97.4 billion offer, with the backing of a consortium of investors, could force OpenAI’s board of directors to reassess how it is valuing the nonprofit, which the board has said will be fairly compensated in the transaction and own a stake in the for-profit. 

The higher the valuation of the nonprofit, the bigger its stake would likely be in the for-profit OpenAI following a conversion.

At the same time, OpenAI is negotiating how much equity Microsoft, its biggest investor, should get in the for-profit company, along with other backers and employees. It is also seeking to raise up to $40 billion of new capital. Investors in that round will likely expect equity when OpenAI becomes a for-profit as well.

Satisfying all those parties was already complicated. If Musk’s gambit increases the equity awarded to the nonprofit, it will be even more difficult.

Bret Taylor, chairman of OpenAI’s board of directors, also poured cold water on Musk’s offer. “OpenAI’s not for sale,” he said at The Wall Street Journal’s CIO Network Summit on Tuesday. “And our job as a board is to exclusively decide what benefits our mission, and as a consequence I think this is largely a distraction and I think the board is going to continue to exclusively focus on the mission.”

Still, some experts said the board might not be able to dismiss the offer out of hand.

“If Elon’s is a fair price and the OpenAI nonprofit is empowered to make the decision, it could sell,” said Harvey Dale, a professor of nonprofit law at New York University.

The board could reject Musk’s bid for reasons beyond money, though. As a charity, OpenAI’s obligation is to fulfill its legal purpose: safely advancing artificial intelligence to benefit humanity.

Yet, none of this directly answers the question I posed.

If Elon Musk promises to make it free, then how can it be worth $97.4 billion?

And if the board rejects Musk’s offer on grounds of protecting humanity, aren’t there some “for profit” contradictions?

Let’s assume making OpenAI for profit would be worth tens of billions of dollars.

I noted the downside is losing nearly $100 billion, asking “What’s the upside?”

One of my readers commented “Principle, and I KNOW you are a man of such, Mish.“

Wow, thanks. I sincerely appreciate that comment. But is that it?

Is Elon Musk principled enough to spend $97.4 billion to save the world from AI mass extinction?