OpenAI’s Leadership Episode Underscored Inherent Risks in Private-Company Investing
The recent leadership episode at OpenAI serves as a cautionary tale for private-market investors, particularly employees who receive company stock as a significant part of their compensation. The abrupt dismissal of Sam Altman, considered a pioneer in generative AI, caused an immediate halt in demand for privately held shares of OpenAI.
On November 17, bids to buy shares of OpenAI reached approximately $100 million on Caplight, a trading platform for private equity. However, when Altman was ousted as the CEO by OpenAI’s board, buyers swiftly withdrew their bids, effectively eliminating all private market demand for the company’s shares. Javier Avalos, co-founder, and CEO of Caplight, confirmed this sudden shift in demand.
Fortunately, Altman’s departure was short-lived as he was rehired by a reconstituted OpenAI board just five days later. However, before his reinstatement, Altman’s planned move to Microsoft had led to a surge in the technology giant’s publicly traded shares.
Following Altman’s return to OpenAI, private market demand for the company’s shares gradually reemerged, although not to the same extent as before. Avalos reported that approximately one-third of the purchase bids that vanished after Altman’s firing had returned to Caplight’s platform.
Currently, the spotlight on private-company investment shines brightest on technology firms striving to make their mark in the rapidly expanding field of AI. Generative AI, in particular, attracts significant demand from speculative buyers who anticipate a highly profitable exit through an eventual initial public offering.
However, this speculation also exposes private market shares to greater volatility compared to their publicly traded counterparts. Publicly traded shares benefit from more liquidity and price transparency. In contrast, the value of private company shares, especially at startups, often hinges on key individuals such as Altman.
This reality hits close to home for employees who embrace stock-based compensation as a substantial part of their remuneration. Financial adviser and Certified Financial Planner David Amman advises all workers with stock-based compensation to diversify their assets, including their stock-compensation plans.
Amman recommends a rule of thumb wherein no more than 5% of one’s investable net worth should be invested in any single stock, especially the companies individuals work for. However, such diversification may prove challenging for private-company employees who face difficulties cashing out.
Despite the potential tax benefits, Amman warns against overvaluing company stock and disregarding volatility risks. Fluctuations in stock price can outweigh the tax savings, particularly in smaller companies.
The OpenAI saga serves as a valuable lesson for workers across various industries who receive stock-based compensation. The episode highlighted the impact of non-market events on individual companies and their underlying stocks.
As private-company employees navigate their compensation plans, it is crucial to balance potential benefits with volatility risks. By embracing diversification and considering the wider implications of stock ownership, individuals can protect their financial well-being.
The OpenAI incident underscores the inherent risks associated with private-company investing, particularly for employees. It is essential for investors and workers alike to approach stock-based compensation with caution, recognizing the potential impact of unforeseen events and prioritizing a diversified investment strategy.
