In Short
- Investors scrutinise AI startups closely on IP ownership, data use, governance, and regulatory risk.
- Weak foundations in corporate records, IP rights, or data compliance can delay or derail funding.
- Early legal preparation strengthens due diligence outcomes and investor confidence.
Tips for Businesses
Before fundraising, ensure corporate filings and cap table are accurate and IP ownership is documented, especially for contractor-created code or models. Map training data sources and confirm UK GDPR compliance and AI governance controls. Review customer and data-use terms to cover outputs, retraining rights, and liability. Organise key documents for efficient investor due diligence.
Summary
This article outlines key legal considerations for AI startups seeking investment in the United Kingdom, including corporate structure, intellectual property, data protection, governance, and contracts. Prepared by LegalVision, a commercial law firm specialising in advising technology and AI businesses, it explains how early legal preparation supports investor due diligence and funding readiness.
AI businesses operating in the UK are growing and attracting significant investor attention. However, since these companies are often more complex than traditional tech startups, legal risks or gaps can make investors hesitant. They could also reduce possible business funding opportunities.
AI startups should begin preparing early when seeking funding. Investors look closely at many legal issues, especially in high-risk fields like AI. In practice, investors are increasingly structuring their questions in AI transactions around AI-specific considerations. For example, they may review bespoke issues around how AI systems are:
- developed;
- trained;
- deployed; and
- commercialised.
This article highlights a simplified introduction to some key legal areas to consider to set up a strong framework before seeking investment. This is a highly complex and developing area, so it is important to seek legal advice specific to your business.
Why Should You Prepare Early for Investment?
Business founders should consider legal matters to ‘get their house in order’ long before seeking investment, as this can help handle potential issues proactively and mitigate risk.
Early legal preparation can help you present your business in a positive light to investors, and tackling legal issues from the outset can prevent risks from affecting investment potential and reassure investors. AI founders should be ready to answer detailed due diligence questions about:
- the type of AI used;
- the company’s role in the AI value chain; and
- the governance measures they have implemented.
Considering Your Corporate Structure
Investors will want to see that your company is built on a solid foundation. As such, you should make sure your Companies House filings are accurate and up to date. Your cap table must be current and show all issued shares.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
Understanding Your AI Systems
Experienced investors will ask detailed questions about your AI systems. They will often want to know:
- what kind of system you have;
- if it uses machine learning or rules; and
- what it can do.
Each of the roles in the company will raise its own legal considerations. Investors will look into this, such as whether you:
- develop;
- offer;
- deploy; or
- distribute the system.
Your risk level can change if you use third-party models or let others use your model. Internal tools may be viewed as less risky than automated systems that deal with customers.
It is also important that you can demonstrate compliance with your AI technology, with key principles, such as:
- safety;
- transparency;
- fairness; and
- accountability.
Protecting Your Intellectual Property
For most AI companies, intellectual property is often the foundation of business value. Investors will want clear proof that you own your:
- source code;
- model designs;
- algorithms;
- training processes; and
- other technical assets.
If third-party contractors, consultants or partners created any intellectual property, it might not belong to your company. You will need to have evidence of appropriate written agreements to transfer ownership of the rights to your business.
Intellectual property created by employees in the course of employment generally vests in the employer, but this automatic rule does not apply to independent contractors and third-party collaborations.
Investors may expect to see evidence of any formal IP protection strategy, such as:
- patent filings where applicable;
- trademark registrations;
- database rights claims; or
- documented trade secret protections.
Even where your technology is not patented, you should be able to demonstrate how confidential know-how is safeguarded.
You must consider who owns the outputs and the risk of infringement when generative systems produce outputs, such as:
- text;
- images; or
- reports.
Training in the UK can raise copyright issues if protected works are copied without a licence. Any AI training activities require you to carefully assess intellectual property rights issues, and you should take legal advice if you are unsure.
Understanding Your Data Obligations
Investors are likely to focus on the origins of your AI data, including training data. They will likely want to know:
- what data you used;
- its source;
- how you obtained it; and
- why you need it.
If training data includes personal data, compliance with the UK GDPR and the Data Protection Act 2018 is fundamental.
You should consider whether your company is a data controller or a data processor, as this distinction is vital and affects your legal duties and risks.
You will likely need to conduct data protection impact assessments for AI systems, especially when profiling or automated decisions have a significant impact on people. If your systems present a high risk, you may need to consult the Information Commissioner’s Office first.
Investors will also expect you to explain global data flows clearly, including where you host, train and deploy systems, and how you comply with UK transfer requirements for international data transfers.
Using AI Responsibly
When AI systems make important decisions that affect people, you need to be especially careful and human review should be genuine to avoid legal problems. Businesses should:
- clearly explain automated decisions;
- allow people to challenge them; and
- ensure humans are involved when needed.
Investors may check whether your automated systems:
- have adequate oversight;
- keep logs; and
- allow people to appeal decisions.
They may also ask about your bias testing, fairness checks, and how you measure algorithm impact. Technical risks can cause legal problems. If your model drifts, it may become less accurate, leading to unfair results. Generative systems can sometimes produce false or misleading results. These mistakes can lead to legal claims and harm your reputation.
Investors will want proof that you:
- monitor your model’s performance;
- keep track of versions;
- check for bias; and
- have ways to fix mistakes.
Prioritising Strong Contracts
Your contracts should make it clear how you manage risk. Customer agreements need to:
- cover who owns the outputs;
- limit liability;
- address intellectual property risks; and
- set rules for using data.
If you use any customer prompts or data to retrain or improve your models, your contracts should clearly allow this. Investors will expect you to make sure this use matches your:
- data protection statements;
- legal reasons for processing; and
- confidentiality duties.
Investors will review how your documents are organised. You can accelerate the investor review process if you have a structured approach with clear and correctly drafted:
- corporate;
- IP;
- data protection; and
- commercial documents.
Overall, focusing on key legal issues and preparing a strong foundation will put your business in a better position when approaching investors and during due diligence.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
Key Takeaways
AI businesses have to deal with many complex issues, such as intellectual property, data protection, and sector-specific regulations. These challenges can lead to many investor questions and concerns during funding discussions. Undertaking a structured legal review before fundraising can help you identify and address legal issues and prepare your business. Strong preparation can show that your business is mature and helps ease investor worries. This is especially important for AI companies, which are often seen as high-risk.
LegalVision provides ongoing legal support for AI and technology businesses through our fixed-fee legal membership. Our experienced lawyers help businesses in the technology industry manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If your AI system uses personal data, you must follow the UK GDPR and the Data Protection Act 2018. Many commercial AI tools use some personal data, so you should review your obligations carefully.
You should start preparing before talking to investors, so you can review and fix any legal issues or risks before negotiations or due diligence begin. For AI companies, this means having clear answers to questions about IP ownership, data management, automated decision safeguards, and navigating complex and fast-developing legal principles.
We appreciate your feedback – your submission has been successfully received.
