OpenAI is reportedly in talks to allow current employees to sell their shares at an estimated valuation of $86 billion. However, OpenAI hasn't finalized the allocation details, and the terms might change.
Earlier this year, OpenAI had already sold a batch of employee shares to venture capital firms, with its valuation then standing at approximately $30 billion. Now, with this second potential share sale on the horizon, its valuation has tripled to a range of $80 billion to $90 billion.
This $90 billion valuation positions OpenAI as a super unicorn, surpassed only by ByteDance and SpaceX. While tech giants Microsoft and Alphabet boast market caps of $2.3 trillion and $1.6 trillion, respectively, their valuations relative to their projected 2023 earnings are lower than that of OpenAI. Currently, Microsoft owns 49% of OpenAI, and if this stock sale goes through, Microsoft's stake in OpenAI would jump from its current $15 billion to between $40 billion and $45 billion.
Instead of issuing new shares, OpenAI permits employees to cash out by selling their shares to external investors, a move known in the capital market as a "tender offer." The primary goal of such tender offers is to provide liquidity for current shareholders, particularly employees and early investors, and secondarily to boost the company's valuation. Given OpenAI's lack of immediate plans to go public, such offers appear mainly to benefit its long-term employees.
Yet, is OpenAI's motive really this straightforward?
As of now, Microsoft and various venture capital firms each hold 49% of OpenAI's equity, with the remaining 2% controlled by the OpenAI Fund. Each investor has a distinct profit cap.
Specifically, OpenAI has implemented a "profit cap" structure that sets an upper limit for returns on its limited partners' (LPs) investments. Any returns exceeding this cap are redirected to the original nonprofit, OpenAI Inc. Industry experts commonly regard this equity structure as cleverly designed to balance business profits with investor returns.
An article by FT Chinese previously delved into OpenAI's financing terms, suggesting that if OpenAI doesn't turn massively profitable, Microsoft would foot the bill. However, if OpenAI could clear a profit of $150 billion to Microsoft and all other external investors, it could break away from Microsoft and regain control.
Numbers released at the end of August indicate OpenAI's march to independence might be expedited. At that time, OpenAI had informed its investors that based on current revenue rates, it expected to generate over $1 billion in income within the next 12 months and reach several billions by 2024, greatly surpassing industry speculations.
Other reports suggest OpenAI's annual revenue projection is set to reach $1.3 billion, outpacing expectations and paving the way for profitability.
The company's rapid growth can, to some extent, be attributed to a combination of its unique equity structure and business explorations. Throughout the year, OpenAI has introduced various pricing tiers, including Plus, Enterprise, and Business versions. To increase revenue, it has frequently revised access limits for GPT-4 and continued on a commercially pragmatic path. As ChatGPT user growth began to stabilize, OpenAI swiftly enhanced ChatGPT with image interpretation capabilities, aiming to tap into another growth curve.
OpenAI's investment landscape is also expanding. As of September this year, OpenAI's investment arm, the Startups Fund, had invested in seven startups across various AI sectors. Recently, they funded a startup specializing in AI-native programming tools, seen as a potential competitor to Microsoft's Visual Studio Code.
Given these developments, the current decision to initiate another tender offer might hint at a desire to adjust equity structures beyond just dividends. Still, as a top target for Silicon Valley venture capitalists, OpenAI hasn't widely opened the door to external financing. Since securing a $10 billion investment from Microsoft earlier in the year, it has only disclosed securing an external investment exceeding $300 million in April.
Rumors suggest OpenAI is carefully selecting its next round of venture capital partners. Y Combinator, where OpenAI CEO Sam Altman once worked, might have a head start, while SoftBank, led by Masayoshi Son, is also seen as a strong contender.
