5 ms·

> For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields (depending on their bracket and how the structure works). Tha

by Jare 9mo ago

> For the right investor base, $10B in annual losses at OpenAI could be worth $2-3B in tax shields (depending on their bracket and how the structure works). That completely changes the return calculation I know nothing about finances at this level, so asking like a complete newbie: doesn't that just mean that instead of risking $10B they're risking $7-8B? It is a cheaper bet for sure, but doesn't look to me like a game changer when the range of the bet's outcome goes from 0 to 1000% or more.

sigmoid10 9mo ago
It all depends on the actual numbers. Consider this simplified example: If you are offered a deal that requires you to lay down 10 billion today and it has a 5% chance to pay out 150 billion tomorrow, your accountants will tell you not to take this deal because your expected return is -2.5 billion. But if you can offset 3 billion in cost to the tax payer, your expected return suddenly becomes $500 million, making it a good deal that you should take every time.
- lotsofpulp 9mo ago
  This applies to any spending Microsoft does. What does it have to do with OpenAI? Also, classifying business expenses as "cost to the tax payer" seems less than useful, unless you are a proponent of simply taxing gross receipts. Which has its merits, but then the discussion is about taxing gross receipts versus income with at least some deductible expenses, not anything to do with OpenAI.
- Fraterkes 9mo ago
  I get that this example is simplified, but doesn’t the maths here change drastically when the 5% changes by even a few percentage points? The error bars on Openais chance of succes are obviously huge, so why would this be attractive to accountants?
  - sigmoid10 9mo ago
    That's why you have armies of accountants rating stuff like this all day long. I'm sure they could show you a highly detailed risk analysis. You also don't count on any specific deal working, you count on the overall statistics being in your favour. That's literally how venture capital works.
    - Fraterkes 9mo ago
      (I think) I get how venture capital works, my point is that the bullish story for openAI has them literally restructuring the global economy. It seems strange to me that people are making bets with relatively slim profit margins (an average of 500m on a 10b investment in your example) on such volatile and unpredictable events.
      - jbs789 9mo ago
        I think you’re right that the critical assumption in that example is the 5pct rather than the tax treatment.
      - sakjur 9mo ago
        What if your 10B investment encourages others to invest 50B and much of that makes it back to you indirectly via selling more of your core business? I may be way off, but to me it seems like the AI bubble is largely a way to siphon money from institutional investors to the tech industry (and try to get away with it by proxying the investments) based on a volatile and unpredictable promise?
      - sdwr 9mo ago
        AI has a lot lower bar to clear to upend the tech industry compared to the global economy. Not being in on AI is an existential risk for these companies.
        Cheezmeister 9mo ago
        False. The existential risk is in companies smoking the AI crackpipe that sama (begging your pardon) handed them, thinking it feels great and then projecting[1] that every investment will hit like the first, and continuing to buy the <EXPLETIVE> crack that they can't afford, and they investors can't afford, and their clients can't afford, their vendors can't afford, the grid can't afford, the planet can't afford, the American people can't afford, and sama[2] can't afford, _because it's <EXPLETIVE> crack_! The wise will shut up and take the win on the slop com bubble. [1]: https://en.wikipedia.org/wiki/Chasing_the_dragon https://en.wikipedia.org/wiki/Chasing_the_dragon [2]: For those following along at home, sama is Sam Altman, he was a part of the Y Combinator community a while back: https://news.ycombinator.com/threads?id=sama https://news.ycombinator.com/threads?id=sama
- well_ackshually 9mo ago
  If your accountants suggest that you take a single 5% chance deal, they probably skipped maths and statistics and you should fire them. It's the dumb as rocks MBAs that will go head first into the 5% chance deal.
  - yossi_peti 9mo ago
    I guess the reasoning assumes that you have multiple eggs in your basket. A 95% chance of failure is bad if you're pinning the whole business on it, but if you have a variety of 5% chance deals, then it can make sense to pursue them, which is basically what venture capitalists do.
    - smeeagain2 9mo ago
      [dead]
      - dangus 9mo ago
        It’s easy to predict that, but when has “the whole thing” ever crashed? Sure, markets can crash, but this idea of “go to zero” never happens. That’s the whole calculus of these investments. Many of them are expected to fail. The fact that it’s painful to the average person means nothing to the people who run the system.
        smeeagain2 9mo ago
        [dead]
        dangus 9mo ago
        I don’t really see what’s relevant about crypto nonsense in this context. We are really talking about the overall economy especially in the tech sector. Even if every cryptocurrency becomes worthless overnight, that doesn’t represent the market going to zero. I see you’ve edited your comment with more doom and gloom. It’s easy to view everything as a bubble when you’re in a negative mental space. > a) collapse of the real estate bubble, especially commercial real estate; Any proof of this bubble? Housing construction continues to lag demand. Offices are largely RTO and Covid-era remote jobs are basically legacy and grandfathered. Every remote employee I know who was laid off in the past couple years had to get a hybrid/in-person job. You can’t just assume 2008 is going to happen again without some real data that shows real estate instability. Where are the poorly qualified borrowers? > b) the ongoing IT crash that is only just getting started; That’s one industry of many. One specific industry struggling doesn’t mean much. > c) whatever damage the (current, red-flavored) orangutan in the White House manages to accomplish in his 3+ remaining years of hell; Lame duck presidency, he can’t crash shit. Congress will be unfriendly next year and already isn’t even very supportive within his own party. > d) fear of looming war; In what universe is any impending war impacting the American economy? You mean the one where defense contractors are hiring and the US is selling weapons to the nations who are doing the fighting? > e) economic fallout from COVID which is still ongoing and expanding (hint--many destroyed businesses and people out of work); You are gonna need to explain this one and back this up with some numbers that make sense. > f) a thousand other icebergs, minefields, and financial hazards confronting us in the near future? Sounds like internal anxiety demons that are not tangible. Look, I’m in full agreement that AI will face some kind of correction or crash, but predicting once in a century catastrophe is a losing game.
- Jare 9mo ago
  Thank you, that made perfect sense and in a very simple (simplified but relevant) way. Besides the idea that such risks get aggregated over a portfolio, I can also imagine how the raw numbers flipping from - to + may be useful to paint as acceptable to accounting a bet you want to take anyway for strategic reasons.
- socialcommenter 9mo ago
  Those 150 billion will be taxable at the same (hypothetically 30%) tax rate, reducing the expected return by 45bn * 5% chance. The expected return is still negative; all this bet does is shift tax liabilities in time, which admittedly would matter to some people who subscribe to short-termism.
  - jaggirs 9mo ago
    I guess to truly calculate it you need to estimate how long it will take to get the ROI (i.e. reach the point where you need to pay taxes on the 150billion). And add back what you can earn by investing the money you didn't have to pay taxes on. I'm not sure what the magnificent 7 can expect as a ROI on invested money though, given that they tend to have enough cash to invest anyways and just pay out dividends.
rjzzleep 9mo ago
That just doesn't sound right. This kind of thought process only works if you think you are guaranteed more than that the next year. It only works in crony capitalism where your friends in government put money in your pockets. It's where we are right now, but definitely not something that is sustainable or something to aspire to.
evrydayhustling 9mo ago
Your intuition is exactly correct. An investor with tax to offset can essentially access the same future upside at a discount However, this discussion will be a perfect introduction to "finances at this level", where about 60% of the action is injecting more variables until you can fit a veneer of quantification onto any narrative.
lumost 9mo ago
The taxes on returning profits to investors via dividends are quite high. You’d be looking at the corporate tax rate (35%) + the dividend tax rates (between 15 and 35%). For any company which may need to raise equity finance later, this is an awful deal - but growing a cash balance doesn’t do the job either. So MSFT is effectively getting 2x the equity by putting money into OpenAI, it also conveys some financial engineering capability as they can choose to invest more when profits are high to smooth out cash flow growth.
- gruez 9mo ago
  >The taxes on returning profits to investors via dividends are quite high. isn't that what buybacks are for?
cjblomqvist 9mo ago
If that $7-8 billion is spent on Azure, then it's basically a way to invest in data center capacity while also getting a big piece of Open AI ownership at the same time. Är the same time, MS revenues are looking real good, causing the stock price to go up. It's a win win win maybe win huge situation.

by Jare 9mo ago

sigmoid10 9mo ago

It all depends on the actual numbers. Consider this simplified example: If you are offered a deal that requires you to lay down 10 billion today and it has a 5% chance to pay out 150 billion tomorrow, your accountants will tell you not to take this deal because your expected return is -2.5 billion. But if you can offset 3 billion in cost to the tax payer, your expected return suddenly becomes $500 million, making it a good deal that you should take every time.

lotsofpulp 9mo ago
This applies to any spending Microsoft does. What does it have to do with OpenAI? Also, classifying business expenses as "cost to the tax payer" seems less than useful, unless you are a proponent of simply taxing gross receipts. Which has its merits, but then the discussion is about taxing gross receipts versus income with at least some deductible expenses, not anything to do with OpenAI.
Fraterkes 9mo ago
I get that this example is simplified, but doesn’t the maths here change drastically when the 5% changes by even a few percentage points? The error bars on Openais chance of succes are obviously huge, so why would this be attractive to accountants?
- sigmoid10 9mo ago
  That's why you have armies of accountants rating stuff like this all day long. I'm sure they could show you a highly detailed risk analysis. You also don't count on any specific deal working, you count on the overall statistics being in your favour. That's literally how venture capital works.
  - Fraterkes 9mo ago
    (I think) I get how venture capital works, my point is that the bullish story for openAI has them literally restructuring the global economy. It seems strange to me that people are making bets with relatively slim profit margins (an average of 500m on a 10b investment in your example) on such volatile and unpredictable events.
    - jbs789 9mo ago
      I think you’re right that the critical assumption in that example is the 5pct rather than the tax treatment.
    - sakjur 9mo ago
      What if your 10B investment encourages others to invest 50B and much of that makes it back to you indirectly via selling more of your core business? I may be way off, but to me it seems like the AI bubble is largely a way to siphon money from institutional investors to the tech industry (and try to get away with it by proxying the investments) based on a volatile and unpredictable promise?
    - sdwr 9mo ago
      AI has a lot lower bar to clear to upend the tech industry compared to the global economy. Not being in on AI is an existential risk for these companies.
      - Cheezmeister 9mo ago
        False. The existential risk is in companies smoking the AI crackpipe that sama (begging your pardon) handed them, thinking it feels great and then projecting[1] that every investment will hit like the first, and continuing to buy the <EXPLETIVE> crack that they can't afford, and they investors can't afford, and their clients can't afford, their vendors can't afford, the grid can't afford, the planet can't afford, the American people can't afford, and sama[2] can't afford, _because it's <EXPLETIVE> crack_! The wise will shut up and take the win on the slop com bubble. [1]: https://en.wikipedia.org/wiki/Chasing_the_dragon https://en.wikipedia.org/wiki/Chasing_the_dragon [2]: For those following along at home, sama is Sam Altman, he was a part of the Y Combinator community a while back: https://news.ycombinator.com/threads?id=sama https://news.ycombinator.com/threads?id=sama
well_ackshually 9mo ago
If your accountants suggest that you take a single 5% chance deal, they probably skipped maths and statistics and you should fire them. It's the dumb as rocks MBAs that will go head first into the 5% chance deal.
- yossi_peti 9mo ago
  I guess the reasoning assumes that you have multiple eggs in your basket. A 95% chance of failure is bad if you're pinning the whole business on it, but if you have a variety of 5% chance deals, then it can make sense to pursue them, which is basically what venture capitalists do.
  - smeeagain2 9mo ago
    [dead]
    - dangus 9mo ago
      It’s easy to predict that, but when has “the whole thing” ever crashed? Sure, markets can crash, but this idea of “go to zero” never happens. That’s the whole calculus of these investments. Many of them are expected to fail. The fact that it’s painful to the average person means nothing to the people who run the system.
      - smeeagain2 9mo ago
        [dead]
        dangus 9mo ago
        I don’t really see what’s relevant about crypto nonsense in this context. We are really talking about the overall economy especially in the tech sector. Even if every cryptocurrency becomes worthless overnight, that doesn’t represent the market going to zero. I see you’ve edited your comment with more doom and gloom. It’s easy to view everything as a bubble when you’re in a negative mental space. > a) collapse of the real estate bubble, especially commercial real estate; Any proof of this bubble? Housing construction continues to lag demand. Offices are largely RTO and Covid-era remote jobs are basically legacy and grandfathered. Every remote employee I know who was laid off in the past couple years had to get a hybrid/in-person job. You can’t just assume 2008 is going to happen again without some real data that shows real estate instability. Where are the poorly qualified borrowers? > b) the ongoing IT crash that is only just getting started; That’s one industry of many. One specific industry struggling doesn’t mean much. > c) whatever damage the (current, red-flavored) orangutan in the White House manages to accomplish in his 3+ remaining years of hell; Lame duck presidency, he can’t crash shit. Congress will be unfriendly next year and already isn’t even very supportive within his own party. > d) fear of looming war; In what universe is any impending war impacting the American economy? You mean the one where defense contractors are hiring and the US is selling weapons to the nations who are doing the fighting? > e) economic fallout from COVID which is still ongoing and expanding (hint--many destroyed businesses and people out of work); You are gonna need to explain this one and back this up with some numbers that make sense. > f) a thousand other icebergs, minefields, and financial hazards confronting us in the near future? Sounds like internal anxiety demons that are not tangible. Look, I’m in full agreement that AI will face some kind of correction or crash, but predicting once in a century catastrophe is a losing game.
Jare 9mo ago
Thank you, that made perfect sense and in a very simple (simplified but relevant) way. Besides the idea that such risks get aggregated over a portfolio, I can also imagine how the raw numbers flipping from - to + may be useful to paint as acceptable to accounting a bet you want to take anyway for strategic reasons.
socialcommenter 9mo ago
Those 150 billion will be taxable at the same (hypothetically 30%) tax rate, reducing the expected return by 45bn * 5% chance. The expected return is still negative; all this bet does is shift tax liabilities in time, which admittedly would matter to some people who subscribe to short-termism.
- jaggirs 9mo ago
  I guess to truly calculate it you need to estimate how long it will take to get the ROI (i.e. reach the point where you need to pay taxes on the 150billion). And add back what you can earn by investing the money you didn't have to pay taxes on. I'm not sure what the magnificent 7 can expect as a ROI on invested money though, given that they tend to have enough cash to invest anyways and just pay out dividends.

rjzzleep 9mo ago

That just doesn't sound right. This kind of thought process only works if you think you are guaranteed more than that the next year. It only works in crony capitalism where your friends in government put money in your pockets. It's where we are right now, but definitely not something that is sustainable or something to aspire to.

evrydayhustling 9mo ago

Your intuition is exactly correct. An investor with tax to offset can essentially access the same future upside at a discount However, this discussion will be a perfect introduction to "finances at this level", where about 60% of the action is injecting more variables until you can fit a veneer of quantification onto any narrative.

lumost 9mo ago

The taxes on returning profits to investors via dividends are quite high. You’d be looking at the corporate tax rate (35%) + the dividend tax rates (between 15 and 35%). For any company which may need to raise equity finance later, this is an awful deal - but growing a cash balance doesn’t do the job either. So MSFT is effectively getting 2x the equity by putting money into OpenAI, it also conveys some financial engineering capability as they can choose to invest more when profits are high to smooth out cash flow growth.

gruez 9mo ago
>The taxes on returning profits to investors via dividends are quite high. isn't that what buybacks are for?

cjblomqvist 9mo ago

If that $7-8 billion is spent on Azure, then it's basically a way to invest in data center capacity while also getting a big piece of Open AI ownership at the same time. Är the same time, MS revenues are looking real good, causing the stock price to go up. It's a win win win maybe win huge situation.