After the directors fired CEO Sam Altman and sparked a potential mass exodus of employees, some investors in OpenAI, the company’s founder, are considering legal action against the board, according to sources with knowledge of the situation.
According to sources, investors are studying their options with legal counsel. If these investors would file a lawsuit against OpenAI was not immediately clear.
With the potential collapse of the most popular startup in the rapidly expanding generative AI sector, investors fear they could lose hundreds of millions of dollars they invested in OpenAI, a crown jewel in some of their portfolios.
A comment request was not answered by OpenAI.
According to reliable sources, Microsoft owns 49% of the for-profit operating company. According to Semafor, the nonprofit parent of OpenAI owns 2 percent of the company, which is controlled by other investors and employees.
According to an internal memo seen by Reuters, Altman was fired by OpenAI’s board on Friday following a “breakdown of communications.”
By Monday, the majority of OpenAI’s 700+ employees had threatened to resign if the board wasn’t replaced.
Venture capitalists typically hold board seats or voting rights in their portfolio companies, but OpenAI is managed by its nonprofit parent company, openAI Nonprofit, which was founded to advance humanity rather than the interests of investors in the open, according to the website of the organization.
According to Minor Myers, a law professor at the University of Connecticut, employees have more power to pressure the board than the venture capitalists who provided the company with funding.
He claimed that no one specifically occupies the position of an injured investor.
That is a feature of OpenAI’s organizational structure, which was initially non-profit but later expanded to include for profit in 2019 in order to raise money. The nonprofit can maintain its “core mission, governance, and oversight” by maintaining control over operations, according to the organization’s website.
The organizations that nonprofit boards oversee are bound by the law. However, according to experts, there is a lot of room for leadership choices in those obligations, such as the need to exercise caution and refrain from self-dealing.
According to Paul Weitzel, a law professor at the University of Nebraska, these obligations can be further constrained in corporate structures like OpenAI, which operated under the auspices of limited liability companies, potentially further shielding the nonprofit’s directors from investors.
Weitzel predicted that investors would have a “weak case” even if they were able to sue. Under the law, businesses have a lot of leeway to make bad business decisions.
Weitzel said, “You can fire visionary founders.”