A transformative work takes something existing and turns it into something with a new purpose, sensibility, or mode of expression.
The term transformative was specifically chosen to highlight in the nonprofit organization's name one of the key legal defenses for fanworks of all kinds (including real person fiction): that they are transformative of original source materials.
Transformative works are creative works about characters or settings created by fans of the original work, rather than by the original creators.
OTW was created to work toward a future in which all fannish works are recognized as legal and transformative, and accepted as legitimate creative activity.
The OTW is the name of the nonprofit organization created to advocate for fandom and to house other projects such as the archive (which will be known as An Archive Of Our Own) and the academic journal.