OpenAI Power Struggle Boils Over As Investors Brandish Lawsuit To Reinstate Ousted CEO

OpenAI Power Struggle Boils Over As Investors Brandish Lawsuit To Reinstate Ousted CEO
May 21, 2024
VC investors want Sam Altman back as OpenAI's CEO
‍KEVIN DIETSCH/GETTY IMAGES

Venture capital firms that have invested in artificial intelligence startup OpenAI are still actively lobbying to have ousted CEO Sam Altman reinstated, according to sources familiar with the situation. These VCs hope to salvage their investments in OpenAI, which now face jeopardy following Microsoft's stunning move over the weekend to hire away Altman and former OpenAI President Greg Brockman.

As Monday drags on without OpenAI's board reversing its controversial decision to fire Altman, anxious investors are weighing various options to try and force the board's hand. Some VC backers are exploring potential legal action against OpenAI's directors for mishandling the leadership crisis, per two people with direct knowledge of the deliberations. While still speculative, any lawsuit would likely aim to hold the board accountable for alleged mismanagement leading to detrimental impacts on shareholder value.

One source noted several major OpenAI investors seem prepared to contribute financing towards litigation efforts to protect their imperiled stakes in the startup, which the board's critics argue has been severely undermined by Altman's ouster. The exact basis for legal allegations remains unclear, though investors feel the board failed in its fiduciary duty by firing Altman in opaque fashion without adequate succession planning. This rash move opened the door for rival Microsoft to opportunistically raid OpenAI's executive talent just as the startup seemed poised to capitalize commercially on its red-hot ChatGPT product.

The board's shock decision last Friday to abruptly terminate Altman over disputed claims he misled directors has thrown OpenAI into disarray right as it appeared on the cusp of achieving dominance in artificial intelligence technology. Several top-tier VC firms holding shares in OpenAI -- including Khosla Ventures, Tiger Global and Sequoia Capital -- now see the window closing fast on securing reasonable returns from their investment in the erstwhile startup darling. Most first obtained stakes earlier this year via a $300 million tender offer which valued OpenAI at $29 billion but granted limited governance rights.

With OpenAI hemorrhaging key personnel to Microsoft and leadership still unsettled, these investors have scant leverage to influence corporate decision-making that might stabilize the company. An OpenAI spokeswoman declined to comment on investor frustration with the board. Other options beyond legal action remain under consideration but would likely prove quixotic so long as Altman's ouster stands. For example, some VC backers originally pushed the idea of replacing the entire OpenAI board after Altman’s firing. But with Microsoft CEO Satya Nadella capitalizing skillfully on the chaos by recruiting Altman and Brockman, investor hopes of reversing course dim by the hour.

Nadella's aggressive hiring of both executives to helm a new Microsoft AI research lab represented a cunning defensive maneuver given Redmond's massive $13 billion bet on OpenAI's technology to date. By luring away OpenAI's brain trust, Nadella left remaining investors essentially stranded while consolidating Microsoft's control amidst the disarray. One business journal had reported OpenAI backers weighing litigation even before this weekend's bombshell hirings by Microsoft. But Nadella's bold talent grab arguably weakened the legal case and negotiating position of outside investors drastically.

Since Microsoft's poachings late Sunday, which included lavish offers for Altman loyalists to defect, virtually OpenAI’s entire workforce has reportedly signed a petition demanding the board's resignation while insisting on Altman's reinstatement as CEO. Employee distrust towards the directors evidently runs so deep now that engineers and scientists seem ready to follow Altman and Brockman out the exits. This ominous prospect of a wholesale exodus by technical talent could force OpenAI into insolvency quickly without top-flight minds to drive research and product development.

Another ominous sign emerged Monday as news broke that an in-progress $86 billion tender offer for employee shares has likely collapsed along with other commercial prospects in Altman's absence. Saddled with uncertainty in leadership and strategy, OpenAI will struggle to convince partners, developers and clients to stand by its side amidst swelling internal dissension. While Microsoft execs smile over boosted stock prices and consolidated AI influence, remaining OpenAI investors seem left sorting through the wreckage wrought by what critics call the board's reckless coup exposing the startup to competitive exploitation.

With bridges seemingly burned between the company and exiled visionary Altman, OpenAI's backers appear all out of cards to play to recoup investor value beyond long-shot legal proceedings. As OpenAI scrambles unsuccessfully to halt its own implosion, Monday's developments signaled to VC firms that their OpenAI bets are headed irretrievably south absent some unforeseen twist. Whether out of frustration or desperation, investor discussions have turned to making a dramatic last stand via the courts to salvage what financial dignity they still can from the investment world's latest icon-turned-pariah.

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