OpenAI employees thwarted in efforts to donate equity in AI startup

OpenAI’s skyrocketing valuation over the past few years has turned a lot of employees at the artificial intelligence startup into paper millionaires.

But when those employees want to donate a portion of their equity to charity, they’ve been unable to do so, according to three people with knowledge of the matter. The company has deprioritized the issue despite employees’ concerns, said the people, who asked not to be named for fear of retaliation.

For OpenAI, which has a highly unusual equity structure due to its origination as a nonprofit, it’s a matter of maintaining tight control over the shareholder base. An OpenAI spokesperson told CNBC that the company isn’t singling out philanthropic donations, and is just practicing good governance.

“We have a cap table for a reason and need to keep that cap table well-managed and know who’s on it,” the spokesperson said.

Equity donations via donor-advised funds (DAFs) are a major consideration at high-valued startups because salaries tend to be modest, and a significant portion of an employee’s net worth is wrapped up in their options or stock holdings. By donating their equity instead of cash, workers can receive charitable deduction benefits and potentially avoid capital gains taxes and other levies, leading to an organization receiving as much as 40% more than it otherwise would, experts told CNBC.

What makes OpenAI unique among tech startups is that it was set up as a nonprofit research lab in 2015, and has continued to operate with a nonprofit parent, even as the company has commercialized products like ChatGPT and headed down a distinctly for-profit path. Rather than traditional equity, employees receive so-called profit participation units (PPUs) that can’t be transferred without company approval.

It’s a topic that’s come up repeatedly at OpenAI in Slack threads, all-hands meeting and internal discussions, but the company has continued to resist making changes that would loosen restrictions, the sources familiar said.

Last year, OpenAI held an employee tender offer, allowing staffers to sell some of their equity to the company. Executives and members of the company’s finance staff told employees at the time that they should be able to expect a charitable donation opportunity soon after the tender, two people said. But the company has indefinitely pushed back the timeline, according to the sources. At this point, one person said, OpenAI is “at least a year late” in offering the opportunity to donate.

Meanwhile, the value of employee holdings keeps going up.

In March, OpenAI closed a $40 billion financing round led by SoftBank at a $300 billion valuation. That’s up more than tenfold from early 2023, which was soon after the public launch of ChatGPT, and up twentyfold from two years before that. Go back to 2019, and the company was valued at $1 billion.

Based on that math, a staffer who joined in 2019 with $100,000 worth of equity in the company would now own a stake worth about $3 million.

OpenAI CFO Sarah Friar said at an all-hands meeting ahead of the latest financing that the company’s priority was closing its funding round, according to a person familiar with the matter. After that, Friar said the focus would be the company’s for-profit conversion, and OpenAI would eventually turn its attention to allowing charitable donations through stock, the person recalled.

In questions submitted by Slack ahead of the meeting, employees asked a lot about donating equity, sources said.

“I’m mystified why a startup would disallow employees from contributing, because it’s a great opportunity not only for their charitable giving impulses but also for their taxes,” Christina Kramlich, co-founder of wealth management firm Cantata Wealth, said in an interview. Kramlich, who’s based in the Bay Area and has worked at multiple tech startups, said DAFs are “an incredibly winning strategy, from the perspective of the contributing donor, as well as the recipient charity.”

DAFs allow employees to receive an immediate fair-market-value tax deduction and to avoid taxes, amounting to anywhere from 20% to 40% of the stock value, that would be incurred if they sold shares and then donated the cash proceeds. Employees can advise the DAF on their charities of choice.

Because DAFs are tax-exempt nonprofits, they get the benefit of liquidating the employee’s shares without incurring capital gains, which all leads to more money for the charity. OpenAI confirmed that it has partnered with Dechomai as its donor-advised fund.

OpenAI said it has offered two equity donation opportunities in the past — in 2021 and 2022 — and that it made a special exception for at least one employee in 2023. But sources told CNBC they’re still frustrated with the shifting timelines and that it’s been so long since the last opportunity.

Some private companies have what amounts to veto power over any move employees make with their shares, a way to exercise greater control over their cap tables. OpenAI doesn’t allow employees to transfer their equity without explicit board approval, according to an agreement viewed by CNBC.

Once the company restructures — and potentially goes public down the road — it will be easier for it to facilitate equity donations, an OpenAI spokesperson said.

OpenAI may have a vested interest in keeping certain charities off its cap table, because many employees are passionate about different, sometimes competing, facets of AI safety. Nonprofits focused on such issues could be seen as antagonistic to the company’s aggressive commercialization efforts.

The dispute over stock donations isn’t the first time employees and management have been at odds over stock ownership.

With no IPO on the near-term horizon and a price tag that makes OpenAI too expensive to be acquired, the only way for shareholders to presently realize any value from their equity is through secondary stock sales.

While OpenAI has implemented plans to allow stakeholders to sell a portion of their shares annually, it previously had the power to claw back vested equity, limiting participation, CNBC reported last year. Soon after that report, OpenAI reversed its policies toward secondary share sales, allowing current and former employees to sell in the tender offers.

But the issue of donations remains a concern. And while employees await that opportunity, they’re dealing with an increasingly complicated corporate structure.

Earlier this month, OpenAI announced that a nonprofit would retain control of the company even as it restructures into a public benefit corporation. Bret Taylor, OpenAI’s board chairman, said that the move will alter the equity structure “so that employees, investors, and the not-for-profit can own equity in that PBC.”

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