Elon Musk Calls for Mandatory Auction of OpenAI Shares

Elon Musk's attorney, Marc Toberoff, has recently urged the attorneys general of California and Delaware to compel OpenAI to auction off a significant portion of its business shares. This move has escalated tensions between Musk and OpenAI's CEO, Sam Altman.

Toberoff, in a letter addressed to the chief legal officers of both states, stated that he represents a group of major AI investors interested in participating in an open bidding process for OpenAI's shares. However, sources familiar with ChatGPT's creator indicate that OpenAI has no plans for such an auction and view Musk's actions as an attempt to create further disruption.

This unusual step is a continuation of Musk's lawsuit against OpenAI from the previous year. Initially established as a nonprofit dedicated to ensuring AI benefits humanity, OpenAI later restructured into a for-profit entity. Musk co-founded OpenAI with Altman and others in 2015, providing crucial early funding, but left the board in 2018 following conflicts with Altman.

A year later, OpenAI launched a for-profit subsidiary to secure external funding, with Microsoft investing over $13 billion. Despite this, the nonprofit still jointly owns the for-profit subsidiary with employees and investors. OpenAI aims to transform into a Public Benefit Corporation (PBC), a type of for-profit entity focused on societal improvement. According to OpenAI, the nonprofit’s substantial stake in the existing for-profit entity would be converted into PBC shares, with fair valuation determined by independent financial advisors.

In his letter, Musk's lawyer advocated for allowing external investors to bid on the nonprofit’s stake in OpenAI. If successful, this could grant external investors significant influence within the startup. Toberoff argues that an auction is the sole method to ensure the nonprofit maximizes value for its assets and fulfills fiduciary duties. Sources suggest the nonprofit's stake in the PBC could be worth tens of billions of dollars.

Musk accused Altman of "Shakespearean deceit" and claimed that OpenAI and Microsoft had strayed from the company's original mission. OpenAI countered that transitioning to a PBC would make it one of the wealthiest nonprofits ever, significantly increasing the value of early supporters' contributions, including Musk's.

Additionally, Musk's team expressed concerns to Delaware authorities over a judge's recent rejection of Musk's $56 billion compensation package. They suggested the conversion to a PBC should occur in California, where OpenAI is headquartered. OpenAI committed to becoming a PBC within two years as part of a $6.6 billion funding round last October, which valued the company at $157 billion. Failure to meet this commitment would allow investors to reclaim their funds.

An OpenAI spokesperson responded: "Elon is waging a legal battle. We remain focused on our mission and work." The attorneys general of California and Delaware did not immediately comment. OpenAI faces several unresolved issues, including negotiations with Microsoft regarding the value of PBC investments. The transition is not imminent and may take months to complete.