Ethics, Legality, & the Case of Open AI

“A nonprofit can sell anything it owns. If a nonprofit owns a piece of land, for example, and it wants to sell that land so that it has more money to spend on its mission, it’s all good. If the nonprofit sold the land for well below market value to the director’s nephew, it would be a clear crime, and the IRS or the state’s Attorney General might well investigate. The nonprofit has to sell the land at a fair market price, take the money, and keep using the money for its nonprofit work.”

- Vox (10/24 Article on OpenAI’s Transition)

In a recent lawsuit against OpenAI, Elon Musk argues that Sam Altman “systematically drained the non-profit of its valuable technology and personnel.” The most common objection that I hear regarding nonprofit investment is simply: can you really do that? How do you start a nonprofit, take advantage of donations and its tax status, and then simply transition to a for-profit?

For clarity: a nonprofit CANNOT transition to a for-profit, for precisely that reason. It would be illegal and unethical for an organization founded on nonprofit principles to one day declare that it had changed its mind.

While the media likes to talk about how OpenAI “transitioned” to a for-profit, that is not what happened. Instead OpenAI sold its assets to a new for-profit company in exchange for an ownership stake that is currently valued at ~$40B (and perhaps far, far more).

This is not semantics; it is an important distinction. The nonprofit organization determined that it could do more in support of its mission with $40B than it could by maintaining control of the technology it had developed.

While the situation has a number of complexities, I find it interesting how few media outlets have reported on the fact that Altman and OpenAI leadership have generated $40B to be used to further the initial and current mission of the nonprofit they founded.

I’d even go so far as to say that if an organization thinks it can do more with the proceeds than the asset itself, it has a moral obligation to sell.

Imagine a struggling, stagnant nonprofit organization. Philanthropic donations are declining. The team huddles to develop a strategy for the upcoming fiscal year. The head of development outlines several new fundraising strategies. The Chief Strategy Officer outlines a handful of creative solutions to increase earned revenue. They discuss lowering costs, renting out their space, and hosting events. But do they even consider the market value of their own assets and the revenue that a sale could generate?