The follow up is at: Part 2: Legal Considerations for the AI-Powered Startup (fcklegal.com)
The Start Up Perspective
AI. LLM. Cloud. No-Code. Technology development is being democratized and it is easier than ever to turn a great idea into a technical revolution. The law, too, is catching up.
The EU AI Act was finally adopted this week in the EU, where a huge number of new laws have been implemented in the past few years addressing the global digital transformation. U.S. state and federal legislatures and regulators are adopting to catch up and compete with Europe for similar regulation (albeit implemented differently). The number of newly minted experts and available checklists and controls sets for “compliance” abound and can easily overwhelm. And if you have recently started out on your entrepreneurial venture, diving into the details of regulatory compliance is probably the last thing you want to think about.
Instead, you are probably thinking the same things as most entrepreneurs: your value proposition, go-to-market plan, and getting a minimum viable product to market before you run out of savings. Perhaps you even have a plan to seek 3F, seed, or VC funding so that you can invest money beyond your personal savings. Legal compliance? Beyond the basics of filing a business name and perhaps grabbing an NDA form off the internet, chances are that you are not remotely concerned about compliance with the AI Act, GDPR, CCPA, or any of the other letters. And you know what? And this may surprise you quite a bit coming from a lawyer – you might not need to… Yet.
Wait? What?
Yes… there are a ton of legal issues that can come up when starting, operating, and growing a business. But not every legal issue needs to be addressed with the same level of urgency. You can and should prioritize. With increased regulation in the U.S. and Europe around the collection and use of data (not to mention existing laws regarding the protection of intellectual property), founders are finding it necessary to address legal risks earlier and earlier in their journey. When founders call me, they frequently want to know “where should we start?” – they cannot tackle every legal risk up-front, so where do they put the effort in first, and how can they plan for later?
I frequently tell them the same thing: put in place a good foundation for scalable legal compliance. What does that mean? Well, given how many times I find myself repeating this, I have outlined the specifics below. Please note: NOT LEGAL ADVICE. This is just general business prioritization stuff. So, take it with a grain of salt. It is not a guarantee, does not and will not create an attorney-client relationship, and is worth (probably) what you are paying for it (i.e., nothing). These are just discussion points for founders to figure out what is best for their enterprise. Specifically:
Get the corporate house in order.
Register the business and agree among founders how things will run (Corporate Governance documentation and/or Operating Agreement). Ideally this should be done before any revenue is generated – no matter how much you all like each other now, when money gets involved, disputes can happen, and operating agreements will help prevent those disputes.
Plan for administration.
Yes, I am fully aware that absolutely no entrepreneur thinks, “What I am most looking forward to is keeping the paperwork straight!” But information and systems management from an early stage can greatly reduce the burden of legal compliance as the business grows. Keeping clear, comprehensive records of assets, data, code, and contracts in a manner that prevents conflicts, inconsistencies, or confusion is necessary to meet various disclosure and notice requirements. Good hygiene and habits set at the beginning of the enterprise will set you up for ongoing success and ease of administration as the enterprise grows and becomes more complex, and a failure to keep on top of this task will create legal risks when important information is unavailable or incorrect due to record keeping errors.
Get your statutory notices done – especially online privacy notices.
If you collect ANY information (including web analytics) on your website., this is absolutely necessary. An experienced digital lawyer should be able to produce or review your preferred terms very quickly and without huge expense except for the most complex cases, in which case they can quickly advise you of the complex regulatory landscape you are entering.
Some folks will think that these statutory notices are less important that the commercial contracts, but I prioritize them here – particularly for digital businesses – because they signal to potential customers and investors that the company has addressed base-level legal compliance. The exercise in producing these notices also provides an opportunity for the company to spot and prioritize additional legal issues, which can be addressed on a risk basis.
Develop clear commercial contract forms.
These should be unique to your business and its risk tolerance levels. While there are great online templates and examples available, beware of using another entity’s contract if you do not have a good understanding of what you are agreeing to.
A good way to conserve budget while getting legal advice is to start with a template you might like and send it to your attorney with an explanation of why you think it is appropriate for your business. The lawyer can then do a faster review and make suggestions for changes specific to your business or point out risks that may still need to be addressed in the contract or elsewhere. I have even taken templates and found them to have overly restrictive terms that could threaten deals while not providing significant benefit.
Keep in contact with your trusted legal advisor.
Any of the tasks above would benefit from a trusted legal advisor. Don’t be afraid to look for someone who understands the challenges of being an entrepreneur. If you think the person is not listening to you, doesn’t ‘get’ your concerns, or will not take into account your business priorities, keep looking. Good strategic partnership is not an exercise in legal theory, and requires frank two-way communication and mutual respect.
Engage with Legal Early.
Of course, the benefits of early and strategic legal engagement, particularly for technology startups with global ambitions, go beyond the realm of mere risk mitigation and prioritization. Find yourself a good lawyer who is willing to work within your priorities and budget and you just might find your best partner for meeting the next major milestone for your business.
Comments