Tech

Musk Ends Suit Against OpenAI, Valued at $80 Billion

Musk Withdraws Lawsuit Against OpenAI as Company Faces $80 Billion Valuation and Regulatory Scrutiny

By Alex P. Chase

6/11, 17:06 EDT
Microsoft Corporation
NVIDIA Corporation
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Key Takeaway

  • Elon Musk has withdrawn his lawsuit against OpenAI, which accused the company of prioritizing profits over its founding mission.
  • OpenAI's valuation has surged to over $80 billion, but employee concerns about equity liquidity and restrictive share sales persist.
  • OpenAI faces legal scrutiny from antitrust investigations and potential litigation related to its treatment of ex-employees.

Musk Withdraws Lawsuit

Elon Musk has withdrawn his lawsuit against OpenAI and its CEO Sam Altman, a day before a California judge was set to hear OpenAI’s request for dismissal. Musk had accused OpenAI of breaching a founding promise by prioritizing profits over humanity, alleging that the company had become a "de facto subsidiary" of Microsoft Corp. in violation of its original non-profit mission. The lawsuit, filed in March, claimed that OpenAI had shifted its focus from developing artificial intelligence for the benefit of humanity to becoming a for-profit entity largely controlled by Microsoft.

Musk, an early backer and part of the founding team of OpenAI, had a falling out with the company and is now raising funds for his own AI startup, X.AI. OpenAI argued that Musk supported the company's transition to a for-profit model in 2017 and insisted it raise "billions." The company also contended that there was no formal founding agreement that it breached, nor any promise to make its technology open-source, as Musk claimed.

Kevin O’Brien, a partner at Ford O’Brien Landy LLP, commented on the case, stating, "It’s certainly a good advertisement for the benefit of Elon Musk. I’m not sure about the legal part though." Musk's X.AI recently announced a $6 billion Series B funding round, with investors including Andreessen Horowitz, Sequoia Capital, and Fidelity Management & Research Company.

OpenAI Employee Concerns

OpenAI's valuation has skyrocketed to over $80 billion following the launch of ChatGPT in late 2022, leaving many early employees with millions of dollars worth of equity. However, concerns have arisen among current and former employees about access to liquidity. With no IPO on the horizon and the company being too expensive to be acquired, the only way for shareholders to realize value from their equity is through secondary stock sales.

OpenAI plans to allow stakeholders to sell a portion of their shares annually, but the company has taken a restrictive approach, raising concerns about its power to determine who participates. Internal documents and interviews reveal that fears 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" to address these concerns, detailing past equity purchases and future plans.

The company has held three tender rounds to date, with the latest between November 2023 and March 2024. Former employees typically participate months after current staffers, with sales limits differing between the two groups. OpenAI has also created a third tier for share sales, consisting of ex-employees who now work at competitors, to safeguard competitively sensitive information.

Legal and Regulatory Scrutiny

OpenAI is facing legal and regulatory challenges, including antitrust investigations by the Federal Trade Commission and the Justice Department into Microsoft, OpenAI, and Nvidia. The company has also disbanded its team focused on the long-term risks of AI, just a year after forming the group. This decision came shortly after the departures of co-founder Ilya Sutskever and Jan Leike, who cited concerns about the company's safety culture.

OpenAI's treatment of ex-employees who leave to work at competitors has raised legal questions, particularly in California, where non-compete agreements are banned. Legal experts suggest that OpenAI's behavior could lead to future litigation tied to non-compete issues. Doug Brayley, a partner at Ropes & Gray, noted, "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."