By Keach Hagey and Sebastian Herrera
OpenAI has successfully converted to a more traditional corporate structure, a move that cleared an obstacle for a potential initial public offering and pushed the valuation of longtime partner Microsoft above $4 trillion.
The artificial-intelligence startup has turned its for-profit subsidiary into a public-benefit corporation, of which Microsoft will own 27%. The conversion will grant OpenAI's nonprofit parent a stake in the for-profit worth $130 billion, with the ability to get more ownership as the for-profit becomes more valuable.
The deal ends nearly a year of wrangling with the attorneys general of California and Delaware, who have the power to regulate nonprofits, as well as with the broader philanthropic community and key investors over the question of whether the AI juggernaut could remain true to its mission while transforming into a more conventional company.
The new structure will make it easier for OpenAI to raise money and attract talent, and could clear the path for an initial public offering.
OpenAI continues to face litigation from Elon Musk's xAI and other parties over its corporate status, as outside groups had alleged that the company strayed from its nonprofit mission in seeking to convert into a for-profit company.
Shares in Microsoft rose about 2% Tuesday and the company's value pushed above $4 trillion. The company reports its first fiscal quarterly earnings Wednesday.
"When Microsoft made some of the initial investments, you had no clue just how large and powerful OpenAI was going to be in the software and AI ecosystem," said Jackson E. Ader, an analyst at KeyBanc Capital Markets. "OpenAI wanted to spread its wings eventually. It was natural."
Under the agreement, Microsoft will have exclusive intellectual-property rights to OpenAI technology until 2032. OpenAI is purchasing an additional $250 billion worth of Microsoft's Azure cloud-computing services, Microsoft said Tuesday, but Microsoft will no longer have a right of first refusal to be OpenAI's computing supplier.
As part of the new structure, the company's nonprofit parent will be renamed the OpenAI Foundation and commit an initial $25 billion to healthcare and AI resilience efforts, on top of the $50 million fund to support nonprofits that it announced earlier this year. The company said it made changes to its planned structure as a result of talks with the offices of the attorneys general of California and Delaware.
The conversion was essential for OpenAI's fundraising efforts, as some of its investors had the right to not pay their full commitments to the company if OpenAI didn't convert by the end of this year.
OpenAI leadership began mulling a conversion to a more traditional structure in the wake of the firing of CEO Sam Altman in late 2023 by the company's nonprofit board, according to people familiar with the matter. He was later reinstated.
In its previous structure, investors like Microsoft didn't own equity, but rather the ability to participate in the profits of the for-profit subsidiary, with profits capped at 100 times their investment for initial investors. Any profits over that were to go to the nonprofit.
In an interview with business streaming show TBPN, Microsoft Chief Executive Satya Nadella said Microsoft is focused on being a "platform company" with many partners, and that it has its own capabilities of creating world-class AI technology. Numerous companies use Microsoft's Azure cloud computing services to train their AI models and run workloads.
"My mindset is all platform," he said. "I'm happy with OpenAI. I would love to have Anthropic, [Microsoft AI], Grok -- anyone. If Google wants to put Gemini on Azure, please do so."
Earlier this year, following Musk's lawsuit and an outcry from critics, including nonprofit groups, over the planned conversion, the company announced it was scaling back its ambitions to turn OpenAI into a more conventional company, and would allow the nonprofit to remain in control of the for-profit.
The deal caps a multiyear saga over the relationship between Microsoft and OpenAI and comes at the end of a summer of tense negotiations.
Microsoft was one of OpenAI's earliest partners and among its largest investors, integrating the company's technology into many of its products and helping fuel the early years of the AI boom. The two companies would later become competitors, sparring over how much control Microsoft had over the startup.
The relationship at one point grew so fractious that OpenAI considered going to antitrust regulators to break out of the contract, The Wall Street Journal reported.
The Journal said in October 2024 that Microsoft had invested $13.75 billion in OpenAI since 2019, and the value of that investment ultimately increased by nearly a factor of 10.
Microsoft has an unusual relationship with OpenAI. The two sides recently reached a tentative agreement to extend their partnership. Microsoft aims to have a level of technological independence from OpenAI as it builds its Copilot assistant, and OpenAI now also depends on other cloud providers for its AI work.
Microsoft now uses AI models from OpenAI rival Anthropic in its 365 tools, and it is also developing its own models independent of OpenAI.
Microsoft's Nadella recently decided to devote more of his schedule to the company's AI initiatives. He told employees this month that he would hand some executive duties to a deputy to focus on Microsoft's technical work, especially involving AI. Nadella desires to be more deeply involved in the company's efforts to develop its AI capabilities and data centers.
Some investors have cautioned that the tech industry's huge spending on AI infrastructure is creating a bubble, with many deals surrounding OpenAI.
On four separate days over the past two months, the stock prices of Oracle, Nvidia, Advanced Micro Devices, and Broadcom soared after they disclosed OpenAI-related deals -- adding a combined $630 billion to their market value in the first day of trading after the announcements.
News Corp, owner of the Journal, has a content-licensing partnership with OpenAI.
Write to Keach Hagey at Keach.Hagey@wsj.com and Sebastian Herrera at sebastian.herrera@wsj.com
(END) Dow Jones Newswires
October 28, 2025 16:20 ET (20:20 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
