The Quest to Keep OpenAI Honest  ## Metadata - Author: [[Decoder with Nilay Patel]] - Full Title: The Quest to Keep OpenAI Honest - Category: #podcasts - URL: https://share.snipd.com/episode/ca223777-2dd2-48ad-a73d-35acaffb93a9 ## Document Notes ## Highlights - **Nonprofit Origin Versus Current Drift** - OpenAI was founded as a nonprofit to protect AGI development from investor profit pressures. - Catherine Bracy warns the company drifted toward for-profit behavior while keeping nonprofit benefits. Transcript: Alex Heath 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. ([Time 0:02:21](https://share.snipd.com/snip/0344ac8e-4091-41c7-b96d-fd115d5bd49d)) - **Nonprofit Benefits Versus Mission Obligations** - Nonprofits receive tax benefits but must serve a public mission, not private profit. - Bracy and Aylad argue OpenAI exploited nonprofit advantages while acting like a competitive for-profit. Transcript: Catherine Bracy 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 inurement 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. ([Time 0:08:31](https://share.snipd.com/snip/d4c81f63-0885-485e-9210-cc895f4d2dd0)) - **Precedent Risk For Silicon Valley** - Allowing OpenAI to convert while keeping assets would set a dangerous precedent for startups. - Competitors like Meta warned this could let companies start nonprofit and later reappropriate public assets. Transcript: Catherine Bracy 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. 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. They have since decided that, in fact, no, they're not. They're going to maintain 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. 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. But 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 its 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. ([Time 0:15:40](https://share.snipd.com/snip/f19105ca-39e5-4836-ac81-f1f645fb666e)) - **Spin Off Assets To A Public Entity** - Preserve nonprofit governance and spin off charitable assets to an independent entity. - Ensure that entity is fairly valued and can fund cross-industry public-interest AI work. Transcript: Alex Heath 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. Orson Aylad 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 the 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. It can remain connected to the open AI so that there are a lot of talks of open AI 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. ([Time 0:19:21](https://share.snipd.com/snip/e9fcffdb-f411-446f-87b4-736df89da134)) - **2023 Board Coup Revealed Power** - The 2023 board coup briefly removed Sam Altman and revealed nonprofit board power over the company. - Alex Heath recalls executives saying the board's action could kill the company, showing governance tension. Transcript: Alex Heath 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 saga, 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. OpenAI 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 like 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. ([Time 0:21:31](https://share.snipd.com/snip/92ecfc5c-4db4-41e8-81a0-a64606bba5ab)) - **Why OpenAI Keeps A Nonprofit Shell** - OpenAI created a capped for-profit arm to attract capital but wants to remove investor caps to raise more funds. - Removing caps would let it accept huge investments and pursue an eventual IPO. Transcript: Alex Heath 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 open AI 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. 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. ([Time 0:30:55](https://share.snipd.com/snip/441c1e12-9485-4f38-a8a2-d86e0b6ca3fe)) - **Precedent From Healthcare Conversions** - There is legal precedent for nonprofits converting to for-profits while leaving assets to public foundations. - Catherine Bracy cites 1990s healthcare conversions as a model for a fair transition. Transcript: Catherine Bracy To be clear, their commission, the nonprofit commission that made the recommendation around independent governance, after that report came out after they made this decision. So 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. The proposal that we're making to the AG is actually built on the precedent of the healthcare companies in the 90s that transitioned from non-profits 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 nonprofit 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. And all of a sudden, they decided not to do that and have created what I think is a bigger mess for themselves in trying to say that this nonprofit has some meaningful control over the for-profit. ([Time 0:32:23](https://share.snipd.com/snip/552aceb5-82a2-4b14-b32c-c6586e42f837)) - **Push For A Transparent AG Investigation** - Ask the Attorney General to complete a transparent investigation and publish specifics of any deal. - Demand public terms that remove conflicts and preserve nonprofit integrity in California. Transcript: Orson Aylad 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 and not for-profit driven? And then on the other end, we want to ensure that there's an 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 these specifics to the public. If they, this is a deal behind closed doors, I think it would just be a huge setback for nonprofit integrity in the state. ([Time 0:36:50](https://share.snipd.com/snip/3bd11291-3d5d-4117-89d1-c8e546003f17)) - **Public Funding To Shape The AI Industry** - Spun-off assets could fund cross-industry public goods like compute, research, and workforce training. - Catherine Bracy frames this as a way to make AI benefit everyone, not just shareholders. Transcript: Catherine Bracy Is a conversation we're having about one company and its governance structure, but it is ramifications for the entire AI industry. And OpenAI 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. Like, they have to compete with Anthropic and Google and Meta and all the other model builders. And 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 is they could do work that would cross 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. ([Time 0:38:41](https://share.snipd.com/snip/a419facb-974d-46ab-8047-820c05852052))