OpenAI PPUs: How OpenAI's unique equity compensation works

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OpenAI has been making headlines nonstop since they launched ChatGPT back in November 2022, even getting themselves an invite to the White House to discuss AI legislation, alongside Google and their biggest investor, Microsoft.

Although primarily known for ChatGPT, OpenAI has had a long history since its founding in 2015. Initially launched as a nonprofit, OpenAI’s goal was and is still to develop artificial general intelligence (AGI) “in the way that is most likely to benefit humanity as a whole.”

OpenAI is extremely secretive with how their compensation works and how it is valued. Naturally, we’ve been getting several questions for more details. Through our Offer Negotiation Service, our coaches work 1-on-1 with clients to get higher offers and we've been able to piece together some insights. Employers, if you’re looking to get more competitive pay insights get in touch.

What is the “capped profit” model?

In 2019, OpenAI changed from a nonprofit to a ‘capped profit’ model in an effort to raise capital while still serving their mission.

Per their blog post, “The fundamental idea of OpenAI LP is that investors and employees can get a capped return if we succeed at our mission, which allows us to raise investment capital and attract employees with startup-like equity. But any returns beyond that amount—and if we are successful, we expect to generate orders of magnitude more value than we’d owe to people who invest in or work at OpenAI LP—are owned by the original OpenAI Nonprofit entity.”

How does an OpenAI offer work?

There are two components to OpenAI’s offer: the base salary and the ‘equity,’ which they call ‘Profit Participation Units’ or ‘PPUs.’ The base salary is standard and self-explanatory. It’s the cash paycheck you get every two weeks.

The profit participation units are where it starts to get confusing, as companies sometimes use profit participation or profit interest grants differently.

Here’s a recent OpenAI offer (see all OpenAI offers here), where you can see a base salary of $300k/year with a $2M PPU grant that vests evenly over 4 years, bringing the yearly total compensation to $800k.

View this offer's breakdown here.

Profit Interest Units

First, we’ll need to understand Profit Interest Units (PIUs), as they seem to be the foundation for OpenAI’s Profit Participation Units (PPUs) structure. PIUs are a form of equity compensation, with heavily customizable terms, that are popular among startups backed by private equity investors.

In simplistic terms, with a PIU you are entitled to a percentage of the profits based on however many PIUs exist. As an example, if you own 1 PIU and there exist a total of 100 PIU’s, you are entitled to 1% of the profits of the company.

What if the company never turns a profit or is not currently turning a profit? Well, if you’ve held on to the PIU then you won’t redeem any value from it. That doesn’t mean the PIU doesn’t have any value per se. Someone that expects the company to generate a profit eventually may value the PIU and be willing to purchase it from you.

Profit interests are unique because they’re often assigned a ‘liquidation threshold’ on their grant date and, usually, this is equal to the equity value of the company. What this means is that the company will need hit profits at or above that amount to redeem any value from the profit interest unit. People receiving profit interests will be granted the units upon their vesting date at no additional cost. Because of that, there’s an additional key tax benefit in that they are tax-free upon issuance and vesting, so the only tax hit would be a capital gains tax when the profit is received or sold.

In contrast, with a traditional Restricted Stock Unit (RSU) that you’d see at a MAANG level company, when the RSU vests, an employee will be taxed upon receiving their RSUs immediately. This is because the RSU is essentially a percentage of equity in the company and holds a value at whatever the market rate is for that company’s stock.

OpenAI’s Profit Participation Units

From what we’ve gathered, OpenAI’s variant of PIU’s is called a Profit Participation Unit (PPU) is nearly the same as a PIU.

When giving candidates an offer, OpenAI will state what they believe to be the value of PPUs given. These PPUs vest evenly over 4 years (25% per year). Unlike stock options, employees do not need to purchase PPUs. PPUs all have the same value associated with them and, during a tender offer, investors purchase PPUs directly from employees. OpenAI makes offers and values their PPUs based on the most recent price investors have paid to purchase employee PPUs.

Note at offer time candidates do not know how many PPUs they will be receiving or how many exist in total. This is important because it’s not clear to candidates if they are receiving 1% or 0.001% of profits for instance. Even when giving options, some startups are often unclear or simply do not share the total number of outstanding shares. That said, this is generally considered bad practice and unfavorable for employees. Additionally, tender offers are not guaranteed to happen and the cadence may also not be known.

PPUs also are restricted by a 2-year lock, meaning that if there’s a liquidation event, a new hire can’t sell their units within their first 2 years. Another key difference is that the growth is currently capped at 10x. Similar to their overall company structure, the PPUs are capped at a growth of 10 times the original value. So in the offer example above, the candidate received $2M worth of PPUs, which means that their capped amount they could sell them for would be $20M.

How are the numbers determined?

OpenAI has an internal compensation guideline they rely on, which they follow pretty closely, as we’ve heard from a few folks who have had trouble negotiating their offers. Our data also seems to support this, with many employees reporting similar base salaries and PPUs. They also have an internal valuation tool, which they use to determine the value and growth of PPUs, so the specific numbers aren’t likely to end up in the public’s awareness.

We don’t know how many PPUs are offered in a traditional offer, so we can’t say how they value each specific unit, but we have seen reports that venture capitalists have given a rough valuation of the company at $27 billion - $29 billion.

It’s important to reiterate that the PPUs inherently are not redeemable for value if OpenAI does not turn a profit. That said, there are investors that have been willing to pay for these PPUs and that’s where the value being told to candidates is derived from.

In conversations with recruiters we’ve heard from some candidates that OpenAI is communicating that they don’t expect to turn a profit until they reach their mission of Artificial General Intelligence (AGI). As with any startup, there are risks associated with equity and it’s important to consider the possibility that equity can be worth nothing.

Prior Liquidation Events

The most recent liquidation event we’re aware of happened during a tender offer earlier this year. It was during this event that some early employees were able to sell their profit participation units. It’s difficult to know how often these events happen and who is allowed to sell, though, as it’s on company discretion.

Does OpenAI provide anything else?

We don’t know currently if OpenAI offers any sort of refreshers or additional PPUs for folks who might be nearing their capped profit or after their 4 year vesting period, but they do offer other benefits worth noting.

Interestingly, we stumbled upon an old job post of theirs, looking for a Director of Equity Administration. One of this person’s job responsibilities is “Overseeing the administration of employee equity, including the issuance, vesting, and tracking of profit participation units,” which is one of the only places we’ve found online that mentions them directly.

Note: The annual salary range for the job was posted as being between $180k-$285k/year, so it sounds like OpenAI is ensuring they keep the PPU component of the offer out of their job postings.

In addition to standard medical, dental, mental health benefits, they offer the following:

• 401(k) plan with 4% matching
• Unlimited time off and 18+ company holidays per year
• Paid parental leave (20 weeks) and family-planning support
• Annual learning & development stipend ($1,500 per year)

How does my company stack up against OpenAI?

While OpenAI’s offers seem huge, the confusing nature of the PPUs can make it hard to compare apples to apples with other companies. If you’re a compensation expert and want to know how your company stacks up to OpenAI and other companies, be sure to check out our compensation benchmarking tool for employers. Understand and benchmark real-time compensation percentiles across 20+ job families, 1000+ locations, and across custom peer sets of over 10,000 companies.

Conclusion

We hope this helps shed some light on OpenAI’s unique compensation structure and how it works. We’re seeing a lot of interest in compensation, especially as talent for AI heats up, and OpenAI is just one of the examples of unique compensation structures being used. If you’re negotiating an offer at OpenAI or otherwise our team of coaches is available to help.