On Friday, OpenAI responded to its co-founder Elon Musk's legal challenge, which sought to halt the company's transition to a fully for-profit entity. In a detailed blog post titled "Elon Musk's For-Profit Vision for OpenAI," the company claimed that Musk had not only desired but actively established a for-profit structure for OpenAI back in 2017.

The post stated, "When he failed to secure majority equity and complete control, he abandoned the project, predicting our failure." It continued, "Now, with OpenAI leading the field in AI research and Musk at the helm of a competing AI firm, he is attempting to use the courts to impede our progress in fulfilling our mission."

Neither Musk nor his AI venture, xAI, have provided a response to these allegations. Since the launch of xAI in July 2023, the company has introduced its Grok chatbot and is reportedly seeking to raise up to $6 billion at a $50 billion valuation, as reported on November 15. This funding is partly intended to purchase 100,000 Nvidia chips.

Musk's skepticism about OpenAI's non-profit model dates back to its inception. According to a member of OpenAI's legal team, Musk was questioning the structure from the very beginning. In a November 2015 email to OpenAI CEO Sam Altman, Musk expressed his concerns, as revealed in the blog post's screenshots. He argued that receiving a salary from a non-profit could disrupt the alignment of incentives and suggested that a standard corporation with a parallel non-profit might be more appropriate.

In a text exchange with former board member Shivon Zilis, OpenAI co-founder Greg Brockman recalled a conversation with Musk that focused on the company's structure. Musk reportedly stated that a non-profit was definitely the right approach initially but might not be suitable now, as per the blog's screenshots.

Musk shared an article about China's AI research strategy with Brockman and fellow co-founder Ilya Sutskever, suggesting that China would do whatever it takes to acquire their developments. He proposed this as another reason to reconsider their direction. Brockman concurred and outlined a path for OpenAI starting in 2018 that would involve "AI research + hardware for-profit," as detailed in the blog post. Musk responded with a tentative plan, expressing his desire to discuss it further.

Negotiations for the proposed for-profit OpenAI took place in the fall of 2017, involving Altman, Brockman, Musk, and others. However, the talks collapsed due to disagreements over equity, control, and leadership roles, as documented in the blog. Musk initially proposed that he should have "unequivocal initial control" of the company, with the understanding that this would change once the board expanded to 12 to 16 members.

In September 2017, Musk established a public benefit corporation named "Open Artificial Intelligence Technologies, Inc." OpenAI rejected Musk's terms for the for-profit entity shortly after and attempted to continue discussions, but Musk declared his offer "no longer on the table" and ended the conversation, as shown in the blog's screenshots.

In January 2018, Musk suggested that OpenAI could become a part of Tesla, his electric vehicle company. He outlined the need for a significant expansion of both OpenAI and Tesla's AI capabilities, as well as the necessity for increased funding and credible board members. Musk believed that OpenAI was on a path to certain failure compared to Google. Brockman countered with a comprehensive plan that emphasized the company's efforts to remain non-profit, as indicated in the screenshots.

In February 2018, Musk resigned from his position as co-chair of OpenAI. OpenAI initially launched as a non-profit in 2015 and later transitioned to a "capped-profit" model in 2019, with the non-profit entity overseeing its for-profit subsidiary. Altman disclosed that the shift to a capped-profit structure was partly due to Musk ceasing financial support for the company.

Thanks to the widespread popularity of ChatGPT, which was introduced in November 2022, OpenAI has become one of the most sought-after and occasionally controversial startups globally. The company's valuation has soared to $157 billion following the launch of ChatGPT. OpenAI has raised approximately $13 billion from Microsoft and closed its most recent $6.6 billion funding round in October, led by Thrive Capital and with participation from Nvidia, SoftBank, and others.

The company also secured a $4 billion revolving line of credit, increasing its total liquidity to over $10 billion. OpenAI anticipates approximately $5 billion in losses on $3.7 billion in revenue for the current year, as confirmed with a source familiar with the situation in September.

OpenAI is currently undergoing a potentially two-year process to become a fully for-profit public benefit corporation, which could make it more appealing to investors. This restructuring plan would also allow OpenAI to maintain its non-profit status as a separate entity, as previously reported.

OpenAI faces growing competition from startups like Musk's xAI and Anthropic, as well as tech giants such as Google, Amazon, and Meta. The generative AI market is expected to generate over $1 trillion in revenue within the next decade, and business spending on generative AI increased by 500% in 2024, according to data from Menlo Ventures.

The legal battle between Musk, OpenAI, and Altman, along with other involved parties and supporters, including tech investor Reid Hoffman and Microsoft, has escalated. In March, Musk filed a lawsuit against OpenAI and its co-founders Altman and Brockman in a San Francisco state court, alleging breach of contract and fiduciary duty. Musk claimed that the original OpenAI team aimed to develop artificial general intelligence for the benefit of humanity but had since transformed the project into a for-profit entity controlled primarily by Microsoft.

In June, Musk withdrew the complaint and later refiled it in federal court. Musk's attorneys argued in the federal suit that OpenAI had violated federal racketeering, or RICO, laws. In November, they expanded their complaint to include allegations that Microsoft and OpenAI had violated antitrust laws when OpenAI allegedly asked investors to agree not to invest in rival companies, including Musk's xAI.

"Microsoft and OpenAI now seek to solidify their dominance by cutting off competitors' access to investment capital (a group boycott), while continuing to benefit from years of shared competitively sensitive information during the formative years of generative AI," the lawyers wrote in the November filing. They added that the terms OpenAI asked investors to agree to constituted a "group boycott" that "blocks xAI's access to essential investment capital."

Altman denied at the DealBook Summit that OpenAI investors are prohibited from investing in competitors. He stated that investors are free to invest elsewhere, but the company will cease sharing its research roadmap and other materials with them. Microsoft has invested nearly $14 billion in OpenAI but announced in October that it would record a $1.5 billion loss in the current period, primarily due to an expected loss from the AI startup.

Microsoft relinquished its observer seat on OpenAI's board in July. However, the Federal Trade Commission will continue to monitor the influence of the two companies over the AI industry, as reported.