Discovering the Unique Nature of OpenAI's Equity Compensation Scheme

Casey Fenton

Discovering the Unique Nature of OpenAI's Equity Compensation Scheme

June 19, 2023

Discovering the Unique Nature of OpenAI's Equity Compensation Scheme

With the rest of the world going wild about artificial intelligence research and development, one organization stands out for its remarkable contributions and forward-thinking approach. OpenAI, a renowned entity established in 2015, has consistently pushed the boundaries of AI to ensure that artificial general intelligence (AGI) benefits all industries and sectors. 

In this article, we will delve into not only OpenAI's groundbreaking contributions to the field of AI but also the company's unique equity compensation structure and how it incentivizes its talented employees.

ChatGPT: AI Made Human

At the forefront of OpenAI's impressive accomplishments is ChatGPT, an extraordinary language model that has taken the online world by storm. ChatGPT boasts the remarkable ability to engage in insightful conversations, providing users with an exceptional AI-powered experience. Powered by state-of-the-art language architecture, ChatGPT showcases the incredible potential of AI systems to comprehend and generate text that is remarkably human-like.

The Shift to a "Capped Profit" Model

In 2019, OpenAI underwent a significant transformation, transitioning from a nonprofit structure to what they termed a "capped profit" model. This pivotal shift was driven by the organization's desire to raise capital while ensuring accessibility to the benefits of artificial general intelligence (AGI) for all.

According to a blog post by OpenAI, the establishment of OpenAI LP marked an innovative approach to allow investors and employees to receive a capped return in the event of successful mission fulfillment. This unique strategy empowers OpenAI to attract and incentivize its talented workforce with equity options, mirroring the common practice in startup environments. Notably, any returns exceeding the capped amount, in the case of significant success, are rightfully owned by the original OpenAI nonprofit entity.

Strategic Balancing of Interests

The adoption of the "capped profit" model exemplifies OpenAI's strategic approach to striking a balance between investment capital and mission-driven objectives. By offering investors and employees a share in the potential financial upside, while simultaneously channeling excess returns back into the nonprofit entity, OpenAI aligns stakeholder interests with its overarching goal of AGI development over the long term.

OpenAI LP and the Future of AGI

OpenAI's establishment of OpenAI LP and the implementation of a capped profit structure underline their commitment to sustainable growth without compromising their mission-driven focus. This forward-thinking approach ensures that the benefits of AGI are not confined solely to private interests. Through providing employees and investors with a sense of ownership and shared purpose, OpenAI ignites a collective drive to propel the development of safe and beneficial artificial general intelligence.

As a pioneering organization at the forefront of AI research, OpenAI has revolutionized the landscape with its groundbreaking creations, notably ChatGPT. By embracing a capped profit model, OpenAI skillfully balances the need for investment capital with its mission of democratizing the advantages of AGI. 

Through this strategic approach, OpenAI envisions a future where the potential benefits of artificial general intelligence are accessible to all, fostering a sense of shared purpose and inspiring its workforce to create a safer and more prosperous world through AGI development.

Equity Compensation Structure at OpenAI

Base Salary and Profit Participation Units (PPUs)

At OpenAI, the compensation structure for employees consists of two fundamental components: the base salary and equity, in the form of Profit Participation Units (PPUs). While the base salary represents the regular cash paycheck, the concept of PPUs can be a bit intricate, as different companies utilize them in varying ways. It is important to delve deeper into the specifics of OpenAI's PPUs to gain a comprehensive understanding of their equity compensation structure.

Profit Interest Units (PIUs): The Foundation of PPUs

To grasp the structure of OpenAI's PPUs, it is crucial to first comprehend the foundation upon which they are built: Profit Interest Units (PIUs). PIUs are customizable equity compensation instruments often employed by startups with support from private equity investors.

In essence, owning a PIU entitles an individual to a percentage of profits based on the total number of PIUs issued. For example, if someone holds 1 PIU and there are 100 PIUs in total, they would be entitled to 1% of the company's profits.

However, it is worth noting that if the company fails to generate profits or is currently unprofitable, the PIU does not yield any value. Nonetheless, individuals who anticipate future profitability may be willing to purchase PIUs, thereby assigning them value.

Distinctive Features of Profit Interests

Profit interests possess a distinct characteristic known as a "liquidation threshold," typically equal to the equity value of the company. In order to redeem any value from a profit interest unit, the company must achieve profits at or above this threshold. Profit interests are granted upon vesting at no additional cost and offer tax advantages, as they are tax-free upon issuance and vesting. Any tax liability typically arises from capital gains upon receiving or selling the profits.

Differences with Traditional Restricted Stock Units (RSUs)

In contrast to OpenAI's equity compensation structure, which incorporates PPUs, major tech companies often utilize Traditional Restricted Stock Units (RSUs). RSUs subject employees to immediate taxation upon vesting. These units represent a percentage of equity in the company and are valued based on the prevailing market rate for the company's stock.

Understanding the Offer and Vesting Schedule

When receiving an offer from OpenAI, the estimated value of the PPUs will be provided. These PPUs will vest evenly over a span of 4 years, with 25% vesting each year. Unlike stock options, PPUs are granted without requiring employees to purchase them. All PPUs hold the same value, and during a tender offer, investors directly purchase PPUs from employees. OpenAI determines offer values based on the most recent investor prices for employee-held PPUs.

It is important to note that at the time of the offer, employees may not know the exact number of PPUs they will receive or the total number of PPUs in existence. This lack of clarity can make it uncertain whether an individual will receive 1% or 0.001% of the profits, for example. Additionally, some startups choose not to disclose the total number of outstanding shares, which is generally perceived as unfavorable for employees. It is also important to keep in mind that tender offers are not guaranteed to occur, and their frequency may remain unknown.

PPUs: Lock and Growth Limitations

PPUs are subject to a 2-year lock, meaning employees are unable to sell their units within the first 2 years in the event of a liquidation event. Moreover, the growth of PPUs is currently capped at 10 times their original value. This growth limitation aligns with the overall company structure, where PPUs have a maximum growth limit of 10 times their initial value. For instance, if an employee receives $2 million worth of PPUs in their offer, the maximum amount they could sell them for would be $20 million.

OpenAI's equity compensation structure offers employees an opportunity to share in the company's success through Profit Participation Units (PPUs). These units, based on the foundation of Profit Interest Units (PIUs), allow individuals to earn a percentage of profits. The offer values and vesting schedules associated with PPUs provide employees with an incentive to contribute to the long-term success of the organization. While certain limitations exist, such as lock periods and growth caps, the equity compensation structure at OpenAI demonstrates a commitment to fostering a sense of shared ownership and aligning employees' interests with the company's overall mission.

Determining the Figures

Internal Compensation Guideline

Within OpenAI, there exists an internal compensation guideline that the company closely adheres to. Numerous individuals who have engaged in negotiations with OpenAI have reported that the organization follows this guideline quite rigorously. The data analysis supports these claims, as many employees have reported similar base salaries and Profit Participation Units (PPUs) across the board. This consistency in compensation reflects OpenAI's commitment to maintaining fairness and transparency within its workforce.

Confidential Valuation Tools

OpenAI utilizes an internal valuation tool to determine the value and growth potential of PPUs. While this tool enables the company to make informed decisions about compensation, it also ensures that specific figures and calculations remain confidential. As a result, the exact numbers associated with PPUs are unlikely to be publicly disclosed or widely known.

Unveiling the Valuation

Although the specific number of PPUs offered in a traditional offer remains unknown, some reports from venture capitalists have shed light on OpenAI's valuation as a company. According to these reports, OpenAI has received rough valuations ranging from $27 billion to $29 billion. However, it is important to note that these valuations do not provide a direct correlation to the value assigned to each individual PPU.

Profitability and Value

It is crucial to understand that PPUs inherently lack redeemable value if OpenAI fails to turn a profit. Nonetheless, investors have demonstrated their willingness to pay for these PPUs, thereby attributing value to them. The value communicated to candidates during the hiring process is derived from the interest and demand shown by these investors.

Mission-Driven Profitability

During discussions with recruiters, candidates have revealed that OpenAI communicates its vision of achieving profitability only upon the fulfillment of its mission to develop Artificial General Intelligence (AGI). Like any startup, there are inherent risks associated with equity compensation, and it is crucial for candidates to acknowledge the possibility that equity may not hold substantial value in the long run.

While the precise intricacies surrounding Profit Participation Units (PPUs) and their valuation remain confidential, estimates from venture capitalists have shed light on OpenAI's overall company worth.

It is vital to recognize that the value of PPUs is contingent upon OpenAI's profitability and the interest shown by investors. Candidates must diligently evaluate the associated risks. OpenAI strives to strike a delicate balance between transparency and confidentiality, aiming to establish a compensation structure that aligns with its mission while fostering a sense of equity and shared ownership among its workforce.

Liquidation Events in the Past

During a recent tender offer conducted earlier this year, a liquidation event took place, allowing certain early employees to sell their profit participation units. However, the frequency and specific criteria for these events, as well as the eligibility to sell, remain at the discretion of the company, making it challenging to ascertain how frequently such opportunities arise.

Other Benefits

While the provision of refreshers or additional Profit Participation Units (PPUs) for employees nearing their capped profit or after the 4-year vesting period remains undisclosed, OpenAI offers a range of notable benefits that enhance the employee experience.

An intriguing discovery emerged in the form of an old job post for a Director of Equity Administration at OpenAI. This role encompasses vital responsibilities such as overseeing the administration of employee equity, including the issuance, vesting, and tracking of profit participation units. This explicit mention of PPUs stands out as one of the rare instances found online.

It is worth noting that the job posting focused primarily on an annual salary range of $180k-$285k/year, without disclosing the specific PPU component of the offer.

In addition to standard medical, dental, and mental health benefits, OpenAI demonstrates a strong commitment to employee well-being and personal development. Their comprehensive benefits package includes a 401(k) plan with a 4% matching contribution, unlimited time off, and an impressive lineup of over 18 company holidays annually. 

Moreover, OpenAI provides a generous paid parental leave of 20 weeks, along with comprehensive family-planning support. Recognizing the importance of continuous growth, OpenAI also allocates an annual learning and development stipend of $1,500 per year, fostering a culture of personal and professional advancement. These robust benefits epitomize OpenAI’s dedication to cultivating a supportive and thriving work environment for its valued employees.

Equity Compensation Doesn’t Have to be Complicated

At this point, we understand if you’re a bit confused about how most tech companies roll out unique equity compensation models for their employees. But you don’t need to reinvent the wheel when there are better options in the market. If you’re aiming for simplicity and transparency in equity plan communication, your best bet is RSU. Find out more about this equity compensation solution by browsing our blog here.

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