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Can anybody explain how this actually works? What happens to all of the non-profit's assets? They can't just give it away for investors to own. The non-profit

Can anybody explain how this actually works? What happens to all of the non-profit's assets? They can't just give it away for investors to own. The non-profit could maybe sell its assets to investors, but then what would it do with the money? I'm sure OpenAI has an explanation, but I really want to hear more details. In the most simple analysis of "non-profit becomes for-profit", there's really no way to square it other than non-profit assets (generated through donations) just being handed to somebody for private ownership.

tomp 2y ago
exactly. If that's how it works, why wouldn't you start every startup as a non-profit? Investment is tax deductible, no tax on profits... Then turn it into a for-profit if/when it becomes successful!
- jameshart 2y ago
  Donations are not investments. They don’t result in ownership.
n2d4 2y ago
After the non-profit sells its assets, it would either donate the proceeds in a way that would be aligned with the original mission, or continue to exist as a bag of cash, basically.
- kweingar 2y ago
  It seems incredibly convenient that a non-profit's leaders can say "I want equity in a for-profit company, so we will sell our assets to investors (who will hire me) and pass off the proceeds to some other non-profit org run by some other schmuck. This is in the public interest."
  - n2d4 2y ago
    State regulators have to sign off on the deal; it's not sufficient for the non-profit board to agree to it.
bschmidt1 2y ago
[flagged]
lolinder 2y ago
If the assets were sold to the for profit at a fair price I could see this being legal (even if it shouldn't be). At least in that case the value generated by the non-profit tax free would stay locked up in non-profit land. The biggest problem with this is that there's basically no chance that the sale price of the non-profit assets is going to be $150 billion, which means that whatever the gap is between the valuation of the assets and the valuation of the company is pure profit derived from the gutting of the non-profit. If this is allowed, every startup founded from now on should rationally do the same thing. No taxes while growing, then convert to for profit right before you exit.
- bdowling 2y ago
  For-profit startups don’t pay taxes while growing either, because they aren’t making any profit during that phase.
  - daveguy 2y ago
    Good point. That sounds a lot like fraud.
    - svnt 2y ago
      Not paying taxes while losing money sounds like fraud to you? What do you propose should be taxed, exactly?
      - daveguy 2y ago
        True, non-profits don't pay taxes on any revenue regardless of expense. How do you know they had no profit with all of the deals with major companies and having one of the most popular software services in existence? Non-profits can earn profit, they just don't have to pay taxes on those profits and they can't distribute those profits to stakeholders -- it goes back to the business. They are also a private company, and do not have to report revenue, expenses, or profits. So yeah, I stand by what I said -- it sounds like fraud. And it deserves an audit.
blackeyeblitzar 2y ago
Maybe it’s a hint that the tax rate for small and medium companies should be reduced (or other non tax laws modified based on company size), to copy the advantages of this nonprofit to profit conversion, while taxes for large companies should be increased. It would maybe help make competition more fair and make survival easier for startups.
- sophacles 2y ago
  This is actually a good idea. I say we go even further and stop wasting so much money cleaning up after companies - get rid of the entire legal entity known as a corporation and let investors shoulder the full liability that comes with their ownership stake.
  - BrawnyBadger53 2y ago
    History has shown that limited liability is a massive advantage for our economy in encouraging both domestic and foreign investment. Seems unlikely we would put ourselves at a global disadvantage by doing this.
    - sophacles 2y ago
      History has also shown that limited liability ends up costing me an awful lot of tax money to cover for some twat getting paid out (at a lower tax rate) with no consequences for their actions. Adding liability would certainly lower my taxes, and have a fantastic chilling effect on the type of trash that harm innocent bystanders with their reckless disregard for consequences in the name of chasing a dollar.
bradleyjg 2y ago
Blue Cross / Blue Shield is a good case study. This is a bit in the weeds but should get you keywords to search for: https://advocacy.consumerreports.org/research/community-involvement/ https://advocacy.consumerreports.org/research/community-invo...
winternett 2y ago
>Can anybody explain how this actually works? Every answer moving forward now will contain embedded ads for Sephora, or something completely unrelated to your prompt... That money will go into the pockets of a small group of people that claim they own shares in the company... Then the company will pull more people in who invest in it, and they'll all get profits based on continually rising monthly membership fees, for an app that stole content from social media posts and historical documents others have written without issuing credit nor compensating them.
baking 2y ago
The nonprofit gives all its ownership rights to the for-profit in return for equity. The nonprofit is free to hold the equity and maintain control or sell the equity and use the proceeds for actual charitable purposes. As long as the money doesn't go into someone's pocket, it's all good (except that Sam Altman is also getting equity but I assume they found a way to justify that.) OpenAI will eventually be forced to convert from a public charity to a private foundation and will be forced to give away a certain percentage of their assets every year so this solves that problem also.
- jprete 2y ago
  The significant asset isn't equity, it's control. 51% is much more valuable than 49% when the owned organization is supposedly working towards technology that will completely change how the world works.
SkyPuncher 2y ago
I've actually worked through a similar situation for a prior startup. We were initially funded by a large, hospital system (non-profit) who wanted to foster innovation and a startup mentality. After getting started, it became clear that it was effectively impossible for us to operate like a startup under a non-profit. Namely, traditional funding routes were neigh impossible and the hospital didn't want direct ownership. It's been many years, but the plan was essentially this: * The original, non-profit would still exist * A new, for-profit venture would be created, with the hospital having a board seat and 5% ownership. Can't remember the exact reason behind 5%. I think it was a threshold for certain things becoming a liability for the hospital as they'd be considered "active" owners above 5%. I think this was a healthcare specific issue and unlikely to affect non-profits in other fields. * The for-profit venture would seek, traditional VC funding. Though, the target investors were primarily in the healthcare space. * As part of funding, the non-profit would grant exclusive, irrevocable rights of it's IP to that for-profit venture. * Everyone working for the "startup" would need to sign a new employment contract with the for-profit. * Viola! You've converted a non-profit into a for-profit business. I'm fuzzy on a lot of details, but that was the high level architecture of the setup. It's one of those things where the lawyers earn a BOAT LOAD of money to make sure every technicality is accounted for, but everything is just a technicality. The practical outcome is you've converted a non-profit to a for-profit business. Obviously, this can't happen without the non-profit's approval. From the outside, it seems that Sam has been working internally to align leadership and the board with this outcome. ----- What will be interesting is how the employees are treated. These types of maneuvers are often an opportunity for companies to drop employees, renegotiate more favorable terms, and reset vesting schedules.
- feoren 2y ago
  > * As part of funding, the non-profit would grant exclusive, irrevocable rights of it's IP to that for-profit venture. This is the part that should land people literally in jail. A non-profit should not be able to donate its assets to a for-profit, and if it's the same people running both companies, those people must be sent to prison for tax evasion. There is no other way to preserve the integrity of the "non-profit" status with this giant loophole.
- 2y ago
jdavdc 2y ago
My expertise is in NFP hospitals. Generally, when they convert for for-profit part of that deal is the creation of a foundation funded with assets that are ostensibly to advance the original not for profit mission.

tomp 2y ago

exactly. If that's how it works, why wouldn't you start every startup as a non-profit? Investment is tax deductible, no tax on profits... Then turn it into a for-profit if/when it becomes successful!

jameshart 2y ago
Donations are not investments. They don’t result in ownership.

n2d4 2y ago

After the non-profit sells its assets, it would either donate the proceeds in a way that would be aligned with the original mission, or continue to exist as a bag of cash, basically.

kweingar 2y ago
It seems incredibly convenient that a non-profit's leaders can say "I want equity in a for-profit company, so we will sell our assets to investors (who will hire me) and pass off the proceeds to some other non-profit org run by some other schmuck. This is in the public interest."
- n2d4 2y ago
  State regulators have to sign off on the deal; it's not sufficient for the non-profit board to agree to it.

bschmidt1 2y ago

[flagged]

lolinder 2y ago

If the assets were sold to the for profit at a fair price I could see this being legal (even if it shouldn't be). At least in that case the value generated by the non-profit tax free would stay locked up in non-profit land. The biggest problem with this is that there's basically no chance that the sale price of the non-profit assets is going to be $150 billion, which means that whatever the gap is between the valuation of the assets and the valuation of the company is pure profit derived from the gutting of the non-profit. If this is allowed, every startup founded from now on should rationally do the same thing. No taxes while growing, then convert to for profit right before you exit.

bdowling 2y ago
For-profit startups don’t pay taxes while growing either, because they aren’t making any profit during that phase.
- daveguy 2y ago
  Good point. That sounds a lot like fraud.
  - svnt 2y ago
    Not paying taxes while losing money sounds like fraud to you? What do you propose should be taxed, exactly?
    - daveguy 2y ago
      True, non-profits don't pay taxes on any revenue regardless of expense. How do you know they had no profit with all of the deals with major companies and having one of the most popular software services in existence? Non-profits can earn profit, they just don't have to pay taxes on those profits and they can't distribute those profits to stakeholders -- it goes back to the business. They are also a private company, and do not have to report revenue, expenses, or profits. So yeah, I stand by what I said -- it sounds like fraud. And it deserves an audit.

blackeyeblitzar 2y ago

Maybe it’s a hint that the tax rate for small and medium companies should be reduced (or other non tax laws modified based on company size), to copy the advantages of this nonprofit to profit conversion, while taxes for large companies should be increased. It would maybe help make competition more fair and make survival easier for startups.

sophacles 2y ago
This is actually a good idea. I say we go even further and stop wasting so much money cleaning up after companies - get rid of the entire legal entity known as a corporation and let investors shoulder the full liability that comes with their ownership stake.
- BrawnyBadger53 2y ago
  History has shown that limited liability is a massive advantage for our economy in encouraging both domestic and foreign investment. Seems unlikely we would put ourselves at a global disadvantage by doing this.
  - sophacles 2y ago
    History has also shown that limited liability ends up costing me an awful lot of tax money to cover for some twat getting paid out (at a lower tax rate) with no consequences for their actions. Adding liability would certainly lower my taxes, and have a fantastic chilling effect on the type of trash that harm innocent bystanders with their reckless disregard for consequences in the name of chasing a dollar.

bradleyjg 2y ago

Blue Cross / Blue Shield is a good case study. This is a bit in the weeds but should get you keywords to search for: https://advocacy.consumerreports.org/research/community-involvement/ https://advocacy.consumerreports.org/research/community-invo...

winternett 2y ago

>Can anybody explain how this actually works? Every answer moving forward now will contain embedded ads for Sephora, or something completely unrelated to your prompt... That money will go into the pockets of a small group of people that claim they own shares in the company... Then the company will pull more people in who invest in it, and they'll all get profits based on continually rising monthly membership fees, for an app that stole content from social media posts and historical documents others have written without issuing credit nor compensating them.

baking 2y ago

The nonprofit gives all its ownership rights to the for-profit in return for equity. The nonprofit is free to hold the equity and maintain control or sell the equity and use the proceeds for actual charitable purposes. As long as the money doesn't go into someone's pocket, it's all good (except that Sam Altman is also getting equity but I assume they found a way to justify that.) OpenAI will eventually be forced to convert from a public charity to a private foundation and will be forced to give away a certain percentage of their assets every year so this solves that problem also.

jprete 2y ago
The significant asset isn't equity, it's control. 51% is much more valuable than 49% when the owned organization is supposedly working towards technology that will completely change how the world works.

SkyPuncher 2y ago

I've actually worked through a similar situation for a prior startup. We were initially funded by a large, hospital system (non-profit) who wanted to foster innovation and a startup mentality. After getting started, it became clear that it was effectively impossible for us to operate like a startup under a non-profit. Namely, traditional funding routes were neigh impossible and the hospital didn't want direct ownership. It's been many years, but the plan was essentially this: * The original, non-profit would still exist * A new, for-profit venture would be created, with the hospital having a board seat and 5% ownership. Can't remember the exact reason behind 5%. I think it was a threshold for certain things becoming a liability for the hospital as they'd be considered "active" owners above 5%. I think this was a healthcare specific issue and unlikely to affect non-profits in other fields. * The for-profit venture would seek, traditional VC funding. Though, the target investors were primarily in the healthcare space. * As part of funding, the non-profit would grant exclusive, irrevocable rights of it's IP to that for-profit venture. * Everyone working for the "startup" would need to sign a new employment contract with the for-profit. * Viola! You've converted a non-profit into a for-profit business. I'm fuzzy on a lot of details, but that was the high level architecture of the setup. It's one of those things where the lawyers earn a BOAT LOAD of money to make sure every technicality is accounted for, but everything is just a technicality. The practical outcome is you've converted a non-profit to a for-profit business. Obviously, this can't happen without the non-profit's approval. From the outside, it seems that Sam has been working internally to align leadership and the board with this outcome. ----- What will be interesting is how the employees are treated. These types of maneuvers are often an opportunity for companies to drop employees, renegotiate more favorable terms, and reset vesting schedules.

feoren 2y ago
> * As part of funding, the non-profit would grant exclusive, irrevocable rights of it's IP to that for-profit venture. This is the part that should land people literally in jail. A non-profit should not be able to donate its assets to a for-profit, and if it's the same people running both companies, those people must be sent to prison for tax evasion. There is no other way to preserve the integrity of the "non-profit" status with this giant loophole.
2y ago

jdavdc 2y ago

My expertise is in NFP hospitals. Generally, when they convert for for-profit part of that deal is the creation of a foundation funded with assets that are ostensibly to advance the original not for profit mission.