Legal Counsel for AI Startups

AI founders move fast. The legal paperwork often does not. Dilendorf Law Firm represents AI startups and their founders nationwide, from the first formation package through seed financing, commercial contracts and, when necessary, complex technology arbitration. This article explains what a sound legal foundation looks like for an AI company.

Start with the right entity

Many AI companies begin as a limited liability company and later become a Delaware corporation because investors and equity plans expect that structure.

Delaware law allows an LLC formed in another state to convert directly into a Delaware corporation by filing a certificate of conversion together with a certificate of incorporation, and the converted corporation “shall, for all purposes of the laws of the State of Delaware, be deemed to be the same entity as the converting other entity” [1].

The conversion must first be approved under the LLC’s own governing documents [1]. Done correctly, contracts, intellectual property and liabilities carry over without a separate transfer.

One compliance item has fallen away. FinCEN’s final rule confirms that “U.S. companies are exempt” from beneficial ownership reporting under the Corporate Transparency Act [2].

Formalities that investors actually check

The certificate of incorporation fixes authorized shares and par value. Bylaws govern meetings, officers and indemnification.

Delaware permits directors to act “without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, or by electronic transmission” [3].

That is how most startups ratify a conversion, adopt bylaws, elect officers and authorize bank accounts. The initial board consent, the stockholder consent adopting the equity plan and each stock issuance belong in a minute book, where investors will look for them.

Cap tables and founder equity

The SEC describes a capitalization table as a document that “names the holders of a company’s equity securities (such as common stock, preferred stock, and convertible notes and warrants)” together with class, share count, price and dates [4].

The cap table should reconcile to signed documents: founder restricted stock purchase agreements, the equity plan reserve, adviser grants and any convertible instruments.

Founder stock is typically subject to a company repurchase right that lapses as it vests, which creates a tax deadline.

A Section 83(b) election lets a service provider be taxed on the stock’s value at grant rather than as it vests, and it “must be filed no later than 30 days after the date the property was transferred” [5].

The IRS now provides Form 15620 for the election, which “may not be revoked except with the consent of the IRS” [5]. Equity issued to employees, consultants and advisers must also fit a securities exemption.

Rule 701 “exempts certain sales of securities made to compensate employees, consultants and advisors,” and shares issued under it are “restricted securities” [6].

Seed rounds

The SEC’s small business office notes that whatever a company calls the round, it “must structure the deal to fit within one of the regulatory exemptions if it wishes to avoid having to register the offering” [7].

The most common path is Rule 506(b), which permits unlimited capital from accredited investors but prohibits general solicitation and requires a Form D notice “within 15 days after the first sale of securities in the offering” [8].

Seed instruments are usually SAFEs or convertible notes; a SAFE holder “does not have an ownership interest in the company unless the triggering event occurs and converts the instrument into equity” [9].

Protecting the AI product

An AI company’s value is in its models, data pipelines and code, so every founder, employee and contractor should sign a confidentiality and invention assignment agreement.

Federal law requires notice of whistleblower immunity in any agreement with an employee “that governs the use of a trade secret or other confidential information”; an employer that omits it can’t recover exemplary damages or attorney fees against that employee in a later trade secret action [10].

Two government positions determine ownership of AI-generated work. The Copyright Office concludes that generative AI outputs “can be protected by copyright only where a human author has determined sufficient expressive elements” and that “prompts alone do not provide sufficient human control” [11].

The USPTO’s revised November 2025 guidance confirms that “only natural persons can be properly named as inventors on patent applications” and that AI systems “are tools used by human inventors” [12].

Development and licensing agreements should allocate rights in training data, fine-tuned models and outputs with these limits in mind.

Software development and licensing deals

Early commercial contracts often outlast the seed round. Key terms include ownership of deliverables versus licensed background technology, data rights, acceptance testing, service levels, limitation of liability and the dispute forum.

Marketing matters too: the FTC has warned that businesses promoting AI capabilities they “cannot support … with concrete evidence” are “breaking the law,” and that “there is no AI exemption to the laws on the books” [13].

For governance-focused AI products, the NIST AI Risk Management Framework’s four functions, “govern, map, measure, and manage,” offer a recognized vocabulary for contract warranties and customer diligence [14].

When deals break: technology arbitration

Most software development, licensing and investor agreements contain arbitration clauses. Under the Federal Arbitration Act, a written arbitration provision in a contract involving commerce “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” [15].

Agreements with foreign developers or customers may fall under the New York Convention where the relationship “envisages performance or enforcement abroad” [15]. These disputes turn on acceptance records, change orders, source code access and expert evidence.

This article is for general informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Dilendorf Law Firm. Attorney Advertising.