In 2011, Marc Andreesen said that software was eating the world; now it is clear that AI is eating software.
As AI disrupts all industries, companies built on this technology are exposed to unique challenges. Inappropriate use of AI can give rise to liabilities affecting the value of a start-up and deal-readiness.
From the point of view of companies, the main concerns in connection with the use of AI are:
- Shadow AI, i.e., employees using AI tools not approved by the company, which can result in leaking proprietary or sensitive data;
- Violation of terms of use of the AI, which can result in penalties or loss of access or penalties;
- Dependence on a single model provider, without a redundancy plan;
- Lack of ownership over the final product or loss of exclusivity over the data processed by the AI;
- Cybersecurity risks in connection with information shared with the AI providers; and
- Breaches to data protection regulations.
Start-ups can prevent and mitigate these risks by way of:
- Setting clear policies in connection with the use of AI and training employees accordingly.
- Auditing their use of AI to ensure that it is compliant with applicable regulations (confidentiality, data protection, etc.) and ensuring that they own the final work product.
Investors and purchasers can adopt different measures to protect themselves in the context of an AI transaction:
- Due Diligence regarding the use of AI by the target. This means understanding how AI is integrated into the business of the target and check that it is being used properly. This includes auditing the terms of use of AI tools, agreements with customers, internal policies, privacy policies, etc.
- Specific representations and warranties regarding the use of AI, including:
– Disclosure of AI- related tools used by the company.
– Ownership of AI tools or proper licensing.
– Ownership of IP products
– Compliance with data protection and related regulations in connection with the use of AI by the company
– Whether the data is used by the AI provider for training purposes.
The representations and warranties should be tailored to the specific use of AI made by the target company.
The adoption of good AI practices benefits start-ups, investors and purchasers; ensuring a smooth path in transactions.
