Elon Musk withdraws lawsuit against OpenAI, employee equity concerns persist

Key Takeaway

• Elon Musk has withdrawn his lawsuit against OpenAI and its co-founders, which accused them of breach of contract and fiduciary duty.
• OpenAI employees are concerned about equity control, with the company valued at over $80 billion but no IPO in sight.
• OpenAI faces legal challenges, including antitrust investigations by the FTC and Justice Department, and criticism for its treatment of ex-employees.

Musk Withdraws Lawsuit

Elon Musk has withdrawn his lawsuit against OpenAI and its co-founders, Sam Altman and Greg Brockman, in California state court. The lawsuit, filed in March, accused OpenAI of breach of contract and fiduciary duty. A hearing was scheduled for Wednesday in San Francisco to consider the defendants' request to dismiss the case. Experts had previously noted that the lawsuit was built on a questionable legal foundation, as the contract at the heart of the suit was not a formal written agreement signed by all parties involved.

Musk alleged that the early OpenAI team aimed to develop artificial general intelligence (AGI) "for the benefit of humanity," but the project has since transformed into a for-profit entity largely controlled by Microsoft. The 35-page complaint highlighted Musk's role in the creation of OpenAI, which has become a leading startup, ranking first on CNBC’s Disruptor 50 list in 2023, largely due to the viral success of ChatGPT.

Kevin O’Brien, a partner at Ford O’Brien Landy LLP, commented, "It’s certainly a good advertisement for the benefit of Elon Musk. I’m not sure about the legal part though." Last year, Musk launched his own AI startup, X.AI, which recently announced a $6 billion Series B funding round. X.AI aims to "understand the true nature of the universe" and has released a chatbot called Grok.

OpenAI Employee Concerns

OpenAI employees, both current and former, have expressed concerns about the company's control over their equity. With OpenAI valued at over $80 billion, many early employees hold significant equity. However, with no IPO on the horizon, the only way for shareholders to realize value is through secondary stock sales. Concerns have intensified after reports that the company could claw back vested equity.

OpenAI has circulated a document titled "Overview and Recap of OpenAI’s Tender Process," detailing past and future equity purchases. The company plans to hold one tender offer roughly every year, depending on market conditions. The issue has become a major topic of conversation among current and former employees.

OpenAI has used aggressive tactics to get employees to sign exit agreements affecting their stock holdings. The company recently backtracked on a controversial decision requiring former employees to choose between signing a non-disparagement agreement and keeping their vested equity. An internal memo addressed to former employees apologized for the language, stating, "It doesn’t reflect our values or the company we want to be."

Legal and Regulatory Challenges

OpenAI faces legal and regulatory challenges, including antitrust investigations by the Federal Trade Commission and the Justice Department. These investigations will examine the influence of Microsoft, OpenAI, and Nvidia on the AI industry. Additionally, OpenAI recently disbanded its team focused on the long-term risks of AI, shortly after co-founders Ilya Sutskever and Jan Leike announced their departures.

The company has also faced criticism for its treatment of ex-employees who leave to work at competitors. Legal experts have noted that OpenAI's behavior could be problematic, especially in California, where non-compete agreements are banned. Doug Brayley, a partner at Ropes & Gray, commented, "It sounds like they are playing hardball, but they would be far from the only company to act like this in the resale of their private securities."

Street Views

• Kevin O’Brien, Ford O’Brien Landy LLP (Neutral on Elon Musk's lawsuit):

  "It’s certainly a good advertisement for the benefit of Elon Musk. I’m not sure about the legal part though."