Mar 4, 2024 - Business

Musk vs. OpenAI: When for-profit and nonprofit blur

Illustration of a hundred dollar bill blurred out except for Benjamin Franklin%27s eyes.

Illustration: Aïda Amer/Axios

It's increasingly common for rich entrepreneurs to convert their successful for-profit companies into nonprofits. When a nonprofit reverses to become a for-profit, the implications for U.S. tax revenues could be gigantic, Elon Musk said Friday in his complaint against OpenAI.

Why it matters: Silicon Valley is based on an ecosystem of thousands of companies raising billions of dollars to invest in high-risk research and development programs.

  • OpenAI has raised the prospect of those programs being nonprofit to begin with, only to transform to for-profit status once revenues start flowing in.

The big picture: Many nonprofit entities, especially universities and hospitals, have commercial revenues running into the billions of dollars.

  • Large international companies like Novo Nordisk, Bertelsmann, Ikea and Tata are run by charitable foundations; U.S. companies like Patagonia, Hershey, and Bloomberg are also moving in that direction.

The other side: OpenAI effectively pivoted to for-profit status in 2019, and continues to move away from its nonprofit founding principles.

  • By the time Musk filed his lawsuit on Friday, the list of for-profit entities named as defendants included OpenAI LP, OpenAI LLC, OpenAI GP LLC, OpenAI OpCo LLC, OpenAI Global LLC, OAI Corporation LLC, and OpenAI Holdings LLC.

How it works: All those for-profit companies are effectively piggybacking on the tax-deductible donations made by Musk and others in the early years.

  • "If this business model were valid, it would radically redefine how venture capitalism is practiced in California and beyond," Musk says in his complaint.
  • If early-stage investments can be funded using pre-tax dollars, then "competing against an entity employing the new OpenAI business model would be like playing a game of basketball where the other team's baskets are worth twice as many points."

Between the lines: That model might not be quite as new as Musk implies. The biggest non-profit institutions in America are the "eds and meds" — i.e. universities, hospitals, and research institutions that can have billions of dollars in revenue — and that regularly birth for-profit corporations.

The bottom line: Musk is aggrieved that his selfless charitable donations to OpenAI ended up generating enormous wealth for the shareholders of Microsoft and OpenAI's for-profit subsidiaries.

  • Given the permeability of the barrier between for-profits and nonprofits, it's reasonable to expect more such complaints in the future.

Go deeper: How a Silicon Valley nonprofit became worth billions

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