OpenAI ex-employees worry about company’s control over their millions of dollars in shares
OpenAI CEO Sam Altman speaks during the Microsoft Build conference at Microsoft headquarters in Redmond, Washington, on May 21, 2024.
Jason Redmond | AFP | Getty Images
OpenAI plans to allow stakeholders to sell a portion of their shares every year, but the company, which has been valued at over $80 billion, is taking a restrictive approach that’s raised concerns among current and former employees about the startup’s power to determine who participates, CNBC has learned.
Due to OpenAI’s skyrocketing valuation following the launch of ChatGPT in late 2022, many early employees are sitting on millions of dollars worth of equity. With no IPO on the horizon and a price tag that makes the company too expensive to be acquired, the only way for shareholders to realize any value from their equity in the near term is through secondary stock sales.
However, current and former OpenAI employees have been increasingly concerned about access to liquidity, according to interviews and documents shared internally. Those fears have intensified in recent weeks after reports that the company had the power to claw back vested equity, said people familiar with the matter, who asked not to be named because the information they shared is confidential.
In an attempt to assuage some of those concerns, OpenAI recently circulated a document, obtained by CNBC, titled, “Overview and Recap of OpenAI’s Tender Process,” detailing how the company has conducted equity purchases in the past and how it plans to handle them in the future. The issue has become a major topic of conversation at OpenAI and among people who have recently left, according to internal documents, Slack messages and exit agreements viewed by CNBC, as well as conversations with multiple former OpenAI employees.
OpenAI has told employees that it will try to hold one tender offer roughly every year, but that depends on how both the company and the market are faring at the time, a person with knowledge of the matter said.
It’s the latest controversy at OpenAI, which has been at the center of the tech universe for much of the past 18 months, most recently announcing a partnership with Apple on Monday to integrate ChatGPT and Siri. Backed by roughly $13 billion from Microsoft, OpenAI has an atypical “capped-profit” model, with a nonprofit as the governing entity for the for-profit subsidiary.
Less than seven months ago, co-founder Sam Altman was suddenly ousted as CEO due to a conflict with the board, before being abruptly reinstated days later after an uproar among investors and loyal staffers.
The Federal Trade Commission and the Justice Department, meanwhile, are set to open antitrust investigations into Microsoft, OpenAI and Nvidia, examining their influence on the AI industry, a source familiar with the matter confirmed to CNBC last week. And last month, OpenAI disbanded its team focused on the long-term risks of AI just a year after forming the group. That came shortly after OpenAI co-founder Ilya Sutskever and Jan Leike, announced their departures, with Leike writing in a post on X that OpenAI’s “safety culture and processes have taken a backseat to shiny products.”
As OpenAI has grown, the company has used aggressive tactics to get employees to sign exit agreements that affect the future of their stock holdings.
“If you have any vested Units and you do not sign the exit documents, including the General Release, as required by company policy, it is important to understand that, among other things, you will not be eligible to participate in future tender events or other liquidity opportunities that we may sponsor or facilitate as a private company,” OpenAI wrote in the agreement, which was viewed by CNBC.
The paperwork for departing employees says that in order to participate in tender events and liquidity opportunities, the person must be in compliance with “all applicable company policies, as determined by OpenAI.”
Last month, OpenAI announced it would backtrack on a controversial decision to make former employees choose between signing a non-disparagement agreement that would never expire and keeping their vested equity in the company. An internal memo, viewed by CNBC, was sent to former employees and shared with current staffers.
The memo, addressed to each former employee, said that at the time of the person’s departure from OpenAI, “you may have been informed that you were required to execute a general release agreement that included a non-disparagement provision in order to retain the Vested Units [of equity].”
“We’re incredibly sorry that we’re only changing this language now,” an OpenAI spokesperson told CNBC after the company changed course. “It doesn’t reflect our values or the company we want to be.”
In an email sent to CNBC late Monday, an OpenAI spokesperson said, “All eligible current and former employees have been offered opportunities for liquidity at the same price in the past, regardless of where they work or what they signed at departure.” The company doesn’t expect that to change, the spokesperson said.
‘Further questions to address’
A former employee, who shared his OpenAI correspondence with CNBC, asked the company for additional confirmation that his equity and that of others was secure.
“I think there are further questions to address before I and other OpenAl employees can feel safe from retaliation against us via our vested equity,” the ex-employee wrote in an email to the company in late May. He added, “Will the company exclude current or former employees from tender events under any circumstances? If so, what are those circumstances?”
The person also asked whether the company will “force former employees to sell their units at fair market value under any circumstances” and what those circumstances would be. He asked OpenAI for an estimate on when his questions would be addressed, and said he hasn’t yet received a response. OpenAI told CNBC that it is responding to individual inquiries.
According to internal messages viewed by CNBC, another employee who resigned last week wrote in OpenAI’s “core” Slack channel that “when the news about the vested equity clawbacks provisions in our exit paperwork broke 2.5 weeks ago, I was shocked and angered.” Details that came out later “only strengthened those feelings,” the person wrote, and “after fully hearing leadership’s responses, my trust in them has been completely broken.”
The person then tagged CEO Sam Altman in the message, highlighting what he described as a paradox in Altman’s stated effort to responsibly build artificial general intelligence, or AGI.
“You often talk about our responsibility to develop AGI safely and to distribute the benefits broadly,” he wrote. “How do you expect to be trusted with that responsibility when you failed at the much more basic task” of not threatening “to screw over departing employees,” the person added.
The company has also, in the past, opened up “donation rounds” to current employees, allowing them to donate a certain amount of their vested equity to charity, which brings with it tax incentives. Former employees could be excluded, as the donation rounds will likely be offered “to active employees only and are not guaranteed to happen,” according to messages viewed by CNBC.
Much of the discussion around future stock issues will now likely include a new voice, after OpenAI announced on Monday that it hired Sarah Friar, who was previously CEO of Nextdoor and CFO of Square, as its finance chief.
OpenAI, which was founded in 2015, has held three tender rounds to date. The first was in mid-2021, the second was between April and June 2023, and the latest was between November 2023 and March 2024.
For former employees, the rounds typically took place months after transactions for current staffers, according to an internal document. In at least two tender offers, the sales limit for former employees was $2 million, compared to $10 million for current employees.
In addition to current and former employees, OpenAI has a third tier for share sales that consists of ex-employees who now work at competitors. Rather than being an official tender, the third group participates in “direct secondary transactions facilitated directly between the buyer (OpenAI or pre-approved investors) and seller,” according to an internal document.
OpenAI said in the document that the reason for separating current and former employees is to avoid delaying the sale process for existing workers and to get a sense of how much equity they want to sell before committing to terms for those who have left.
OpenAI said the reason for the third category had to do with “safeguarding competitively sensitive information,” since “by law, we must share certain information with all sellers and buyers in the same tender offer.”
“For example, in prior tender offers, we have disclosed detailed financial data, and non-public information about our Microsoft deals, even when the negotiations were still ongoing and unannounced,” the company wrote in the internal document.
Larry Albukerk, founder of EB Exchange, which helps tech workers with pre-IPO stock sales, told CNBC that while companies have a lot of latitude in how they handle tender offers, as long as it’s written in the contract, creating an adversarial relationship with former employees can be damaging for morale.
“Ultimately, employees are going to become ex-employees,” Albukerk said. “You’re sending a signal that, the second you leave, you’re not on our team, and we’re going to treat you like you’re on the other team. You want people to root for you even after they leave.”
Stock worth $0?
Of even greater concern, some insiders said, is language in the terms of a corporate document related to Aestas, a company OpenAI set up to manage the offerings. The document suggests ex-employees could be stripped of their equity.
For anyone who leaves OpenAI, “the Company may, at any time and in its sole and absolute discretion, redeem (or cause the sale of) the Company interest of any Assignee for cash equal to the Fair Market Value of such interest,” the document states.
Former OpenAI employees said that anytime they received a unit grant, they had to send a document to the IRS stating that the fair market value of the grant was $0. CNBC viewed a copy of the document. Ex-employees told CNBC they’ve asked the company if that means they could lose their stock for nothing.
OpenAI said it’s never canceled a current or former employee’s vested equity or required a repurchase at $0.
Legal experts said OpenAI’s treatment of ex-employees who leave to work at competitors could be problematic, especially in California.
In April, the FTC voted to ban non-compete agreements for for-profit companies. A final rule will go into effect in September. The ban not only protects people from punishment for accepting another role, but also covers any agreement that “penalizes a worker” or “functions to prevent” a worker from working at a competitor.
An attorney, who asked not to be named due to client conflicts in the space, said that OpenAI’s behavior towards those ex-employees leaves a “plausible argument” for future litigation tied to the non-compete issue. Another attorney, who also requested anonymity, called it “undue pressure.”
“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,” Doug Brayley, a partner at Ropes & Gray, said in an interview. “Private companies generally leave themselves a lot of discretion about how to treat the repurchase of their equity.”
Alex Karp, CEO of Palantir Technologies speaks during the Digital X event on September 07, 2021 in Cologne, Germany.
Andreas Rentz | Getty Images
Palantir shares continued their torrid run on Friday, soaring as much as 9% to a record, after the developer of software for the military announced plans to transfer its listing to the Nasdaq from the New York Stock Exchange.
The stock jumped past $64.50 in afternoon trading, lifting the company’s market cap to $147 billion. The shares are now up more than 50% since Palantir’s better-than-expected earnings report last week and have almost quadrupled in value this year.
Palantir said late Thursday that it expects to begin trading on the Nasdaq on Nov. 26, under its existing ticker symbol “PLTR.” While changing listing sites does nothing to alter a company’s fundamentals, board member Alexander Moore, a partner at venture firm 8VC, suggested in a post on X that the move could be a win for retail investors because “it will force” billions of dollars in purchases by exchange-traded funds.
“Everything we do is to reward and support our retail diamondhands following,” Moore wrote, referring to a term popularized in the crypto community for long-term believers.
Moore appears to have subsequently deleted his X account. His firm, 8VC, didn’t immediately respond to a request for comment.
Last Monday after market close, Palantir reported third-quarter earnings and revenue that topped estimates and issued a fourth-quarter forecast that was also ahead of Wall Street’s expectations. CEO Alex Karp wrote in the earnings release that the company “absolutely eviscerated this quarter,” driven by demand for artificial intelligence technologies.
U.S. government revenue increased 40% from a year earlier to $320 million, while U.S. commercial revenue rose 54% to $179 million. On the earnings call, the company highlighted a five-year contract to expand its Maven technology across the U.S. military. Palantir established Maven in 2017 to provide AI tools to the Department of Defense.
The post-earnings rally coincides with the period following last week’s presidential election. Palantir is seen as a potential beneficiary given the company’s ties to the Trump camp. Co-founder and Chairman Peter Thiel was a major booster of Donald Trump’s first victorious campaign, though he had a public falling out with Trump in the ensuing years.
When asked in June about his position on the 2024 election, Thiel said, “If you hold a gun to my head I’ll vote for Trump.”
Thiel’s Palantir holdings have increased in value by about $3.2 billion since the earnings report and $2 billion since the election.
In September, S&P Global announced Palantir would join the S&P 500 stock index.
Analysts at Argus Research say the rally has pushed the stock too high given the current financials and growth projections. The analysts still have a long-term buy rating on the stock and said in a report last week that the company had a “stellar” quarter, but they downgraded their 12-month recommendation to a hold.
The stock “may be getting ahead of what the company fundamentals can support,” the analysts wrote.
Charles Liang, chief executive officer of Super Micro Computer Inc., during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024. The trade show runs through June 7.
Annabelle Chih | Bloomberg | Getty Images
Super Micro Computer could be headed down a path to getting kicked off the Nasdaq as soon as Monday.
That’s the potential fate for the server company if it fails to file a viable plan for becoming compliant with Nasdaq regulations. Super Micro is late in filing its 2024 year-end report with the SEC, and has yet to replace its accounting firm. Many investors were expecting clarity from Super Micro when the company reported preliminary quarterly results last week. But they didn’t get it.
The primary component of that plan is how and when Super Micro will file its 2024 year-end report with the Securities and Exchange Commission, and why it was late. That report is something many expected would be filed alongside the company’s June fourth-quarter earnings but was not.
The Nasdaq delisting process represents a crossroads for Super Micro, which has been one of the primary beneficiaries of the artificial intelligence boom due to its longstanding relationship with Nvidia and surging demand for the chipmaker’s graphics processing units.
The one-time AI darling is reeling after a stretch of bad news. After Super Micro failed to file its annual report over the summer, activist short seller Hindenburg Research targeted the company in August, alleging accounting fraud and export control issues. The company’s auditor, Ernst & Young, stepped down in October, and Super Micro said last week that it was still trying to find a new one.
The stock is getting hammered. After the shares soared more than 14-fold from the end of 2022 to their peak in March of this year, they’ve since plummeted by 85%. Super Micro’s stock is now equal to where it was trading in May 2022, after falling another 11% on Thursday.
Getting delisted from the Nasdaq could be next if Super Micro doesn’t file a compliance plan by the Monday deadline or if the exchange rejects the company’s submission. Super Micro could also get an extension from the Nasdaq, giving it months to come into compliance. The company said Thursday that it would provide a plan to the Nasdaq in time.
A spokesperson told CNBC the company “intends to take all necessary steps to achieve compliance with the Nasdaq continued listing requirements as soon as possible.”
While the delisting issue mainly affects the stock, it could also hurt Super Micro’s reputation and standing with its customers, who may prefer to simply avoid the drama and buy AI servers from rivals such as Dell or HPE.
“Given that Super Micro’s accounting concerns have become more acute since Super Micro’s quarter ended, its weakness could ultimately benefit Dell more in the coming quarter,” Bernstein analyst Toni Sacconaghi wrote in a note this week.
A representative for the Nasdaq said the exchange doesn’t comment on the delisting process for individual companies, but the rules suggest the process could take about a year before a final decision.
A plan of compliance
The Nasdaq warned Super Micro on Sept. 17 that it was at risk of being delisted. That gave the company 60 days to submit a plan of compliance to the exchange, and because the deadline falls on a Sunday, the effective date for the submission is Monday.
If Super Micro’s plan is acceptable to Nasdaq staff, the company is eligible for an extension of up to 180 days to file its year-end report. The Nasdaq wants to see if Super Micro’s board of directors has investigated the company’s accounting problem, what the exact reason for the late filing was and a timeline of actions taken by the board.
The Nasdaq says it looks at several factors when evaluating a plan of compliance, including the reasons for the late filing, upcoming corporate events, the overall financial status of the company and the likelihood of a company filing an audited report within 180 days. The review can also look at information provided by outside auditors, the SEC or other regulators.
Last week, Super Micro said it was doing everything it could to remain listed on the Nasdaq, and said a special committee of its board had investigated and found no wrongdoing. Super Micro CEO Charles Liang said the company would receive the board committee’s report as soon as last week. A company spokesperson didn’t respond when asked by CNBC if that report had been received.
If the Nasdaq rejects Super Micro’s compliance plan, the company can request a hearing from the exchange’s Hearings Panel to review the decision. Super Micro won’t be immediately kicked off the exchange – the hearing panel request starts a 15-day stay for delisting, and the panel can decide to extend the deadline for up to 180 days.
If the panel rejects that request or if Super Micro gets an extension and fails to file the updated financials, the company can still appeal the decision to another Nasdaq body called the Listing Council, which can grant an exception.
Ultimately, the Nasdaq says the extensions have a limit: 360 days from when the company’s first late filing was due.
A poor track record
There’s one factor at play that could hurt Super Micro’s chances of an extension. The exchange considers whether the company has any history of being out of compliance with SEC regulations.
Between 2015 and 2017, Super Micro misstated financials and published key filings late, according to the SEC. It was delisted from the Nasdaq in 2017 and was relisted two years later.
Super Micro “might have a more difficult time obtaining extensions as the Nasdaq’s literature indicates it will in part ‘consider the company’s specific circumstances, including the company’s past compliance history’ when determining whether an extension is warranted,” Wedbush analyst Matt Bryson wrote in a note earlier this month. He has a neutral rating on the stock.
History also reveals just how long the delisting process can take.
Charles Liang, chief executive officer of Super Micro Computer Inc., right, and Jensen Huang, co-founder and chief executive officer of Nvidia Corp., during the Computex conference in Taipei, Taiwan, on Wednesday, June 5, 2024.
Annabelle Chih | Bloomberg | Getty Images
Super Micro missed an annual report filing deadline in June 2017, got an extension to December and finally got a hearing in May 2018, which gave it another extension to August of that year. It was only when it missed that deadline that the stock was delisted.
In the short term, the bigger worry for Super Micro is whether customers and suppliers start to bail.
Aside from the compliance problems, Super Micro is a fast-growing company making one of the most in-demand products in the technology industry. Sales more than doubled last year to nearly $15 billion, according to unaudited financial reports, and the company has ample cash on its balance sheet, analysts say. Wall Street is expecting even more growth to about $25 billion in sales in its fiscal 2025, according to FactSet.
Super Micro said last week that the filing delay has “had a bit of an impact to orders.” In its unaudited September quarter results reported last week, the company showed growth that was slower than Wall Street expected. It also provided light guidance.
The company said one reason for its weak results was that it hadn’t yet obtained enough supply of Nvidia’s next-generation chip, called Blackwell, raising questions about Super Micro’s relationship with its most important supplier.
“We don’t believe that Super Micro’s issues are a big deal for Nvidia, although it could move some sales around in the near term from one quarter to the next as customers direct orders toward Dell and others,” wrote Melius Research analyst Ben Reitzes in a note this week.
Super Micro’s head of corporate development, Michael Staiger, told investors on a call last week that “we’ve spoken to Nvidia and they’ve confirmed they’ve made no changes to allocations. We maintain a strong relationship with them.”
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