| Welcome back! OpenAI this week restructured itself into a company with traditional equity, and it wasn't long before rumblings about an initial public offering followed. There are plenty of reasons why an IPO listing may not happen until 2027 at the earliest, according to a person who has been involved in the discussion. Among them: It's likely to be one of the biggest in history in terms of the capital OpenAI will seek, and it will require plenty of time for regulatory review. We think it's more likely the company will raise more funding privately before it goes public. There's a solid history of companies raising large slugs of cash in the year or two leading up to the IPO, often from the kinds of public market investors that also buy into the listing. In OpenAI's case, it already has several of these public market investors, including T. Rowe Price and Fidelity Management. I'm sure there's demand from other deep-pocketed investors too. For instance, OpenAI previously held conversations with Saudi Arabia's Public Investment Fund and multinational conglomerates such as India's Reliance Industries about potential funding, we've reported. As for what happens in 2027, an IPO seems like a decent bet. Earlier this year, as OpenAI was lining up investors to buy employee shares at a $500 billion valuation, its executives told some investors it expects to raise nearly $90 billion in capital in 2027 alone, according to a person with knowledge of the projections. In theory, that could include capital from an IPO. OpenAI had about $9.6 billion in cash at the end of June, according to financial disclosures to shareholders, and the board of lead investor SoftBank recently approved its $22.5 billion investment in OpenAI's $41 billion fundraise. That means OpenAI has more than enough money to get to 2027, considering the roughly $26 billion it had projected to burn through the end of next year. For OpenAI, the cash is necessary to feed its ever-growing server needs, which it projects will total nearly $125 billion over the next three years and will be a key factor in its projected cash burn of $115 billion through 2029. Pre-IPO funding rounds also serve another purpose: drumming up demand from investors that straddle both private and public investing and are looking for a quick valuation jump. They can also give investors a close look at a company's financials—including problems that could thwart a successful IPO, such as a concentration of too many sales with one customer. But OpenAI will still need to run the gauntlet of requirements for a public listing, including establishing a regular quarterly reporting schedule and ensuring that its financials meet public transparency standards. The company also will likely need to address some unusual risks facing its investors. For instance, the OpenAI Foundation's board can name and remove the OpenAI corporation's board, and the corporation's board can only consider the mission to benefit humanity, not the interests of shareholders, when it comes to safety and security issues. And if the company hits a $5 trillion valuation after 15 years, the nonprofit could also gain additional shares through warrants, giving it a single-digit percentage of incremental ownership over time worth hundreds of billions of dollars, according to two people with knowledge of OpenAI's plans. One factor that smoothed the way for the restructuring was the $500 billion valuation, which was much higher than the round led by SoftBank that valued it at $300 billion. That's because OpenAI, Microsoft and their bankers (Goldman Sachs and veteran banker Michael Klein for OpenAI, Morgan Stanley for Microsoft) agreed to value the stakes using the Black-Scholes option pricing model. That takes into account the spot price (the current value of OpenAI) as well as the company's potential future value, said a person with knowledge of the discussions. When OpenAI was worth $300 billion, Microsoft's 27% stake would have been worth just $81 billion, giving it an incentive to push for a higher percentage of equity. At the $500 billion valuation, the 27% stake is worth $135 billion. No doubt that seemed a lot more palatable to Microsoft. In this case, OpenAI showed that its ability to sell shares to investors solves many problems. A future IPO will test that ability again. | 
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