AsianFin -- Microsoft Corporation shares rose nearly 2% to close at their new record of $542.07 on Tuesday, driving the company’s market value to top $4 trillion. Microsoft re-entered the $4 trillion market-cap club as the second U.S.-listed firm to reach the milestone after the software giant finalized a long-awaited deal with OpenAI. The deal seemed to reassure investors regarding future partnership as it solidified Microsoft as a major holder of OpenAI’s for-profit and clarified its crucial intellectual-property (IP) rights.
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Microsoft and OpenAI on Tuesday announced a new definitive agreement to allow the ChatGPT maker to complete its for-profit restructuring. Under the deal, Microsoft supports the OpenAI board moving forward with formation of a public benefit corporation (PBC) and recapitalization.
OpenAI’s for-profit LLC, which has been under the nonprofit parent since 2019, has transitioned to a PBC–a purpose-driven company structure that has to consider the interests of both shareholders and the mission. The nonprofit, now called the OpenAI Foundation, remains control of the new OpenAI Group PBC and holds equity in it valued at about $130 billion, making it “one of the best resourced philanthropic organizations ever”, according to OpenAI.
OpenAI said the recapitalization also grants the OpenAI Foundation additional ownership as its for-profit reaches a valuation milestone. Microsoft said it currently holds an investment in OpenAI Group PBC valued at approximately $135 billion, representing roughly 27% on an as-converted diluted basis, inclusive of all owners – employees, investors, and the OpenAI Foundation.
The agreement preserves key elements that Microsoft believed have fueled this partnership. That means OpenAI remains Microsoft’s frontier model partner and Microsoft continues to have exclusive IP rights and Azure API exclusivity until Artificial General Intelligence (AGI). The deal requires an independent expert panel to verify OpenAI’s declaration of AGI it achieves.
The deal extends Microsoft’s IP rights for both models and products through 2032 and now include models post-AGI, with appropriate safety guardrails. It retains Microsoft’s IP rights to research, defined as the confidential methods used in the development of models and systems, until either the expert panel verifies AGI or through 2030.
The agreement allows OpenAI to co-develop some products with third parties while API products developed with third parties will be exclusive to Microsoft’s Azure. It also lets Microsoft to independently pursue AGI alone or in partnership with third parties.
As of October 2024, Microsoft has invested $13.75 billion in OpenAI since 2019, including its share of the startup’s $6.6 billion fundraising in October. Such massive investment entitles Microsoft to a percentage of OpenAI’s profits. It was reported that Microsoft will continue to be entitled to receive 20% of OpenAI’s revenue. The revenue share agreement remains until the expert panel verifies AGI, though payments will be made over a longer period of time, Microsoft said in its statement.
OpenAI said its non-profit will initially focus on a $25 billion commitment across two areas: health and curing diseases and technical solutions to AI resilience. “The OpenAI mission—ensuring that AGI benefits all of humanity—will be advanced through both the business and the Foundation. The more OpenAI succeeds as a company, the more the non-profit’s equity stake will be worth, which the non-profit will use to fund its philanthropic work,” OpenAI said in a statement.
The agreement alleviates a key concern for Microsoft, as it "importantly provides [Microsoft] shareholders with upside optionality related to [OpenAI]'s future growth," Evercore ISI analyst Kirk Materne wrote in a note Tuesday.
Technology analyst Zeus Kerravala called Microsoft’s dropping its cloud exclusivity with OpenAI a “major concession on its part.” But he noted the company had secured several critical, structural concessions from OpenAI that “ensure the longevity and value of Microsoft’s investment.” “Essentially, Microsoft traded cloud compute exclusivity, something it was struggling to meet anyway, for technological certainty and long-term IP access,” he told Fortune.
