8 Legal Documents Every AI Tech Startup Needs in California

Founding a startup is an exciting but complex process, especially in a cutting-edge field like artificial intelligence (AI). With the fast pace of innovation and stiff market competition, it’s easy for legal formalities to fall by the wayside.

However, neglecting key legal documents and agreements can lead to co-founder conflicts, intellectual property disputes, regulatory penalties, and other expensive headaches down the road.

As experienced startup attorneys here in California’s tech hubs, we’ve seen firsthand how investing in proper legal groundwork from the outset pays dividends as your company scales. Below, we’ve outlined some of the most essential legal documents and why they’re so critical for budding AI entrepreneurs.

1. Articles of Incorporation or Organization

One of your very first steps will be choosing and forming a legal business entity, most commonly a corporation (C-corp or S-corp) or limited liability company (LLC). Your formation document, called Articles of Incorporation for corporations or Articles of Organization for LLCs, establishes your startup as a separate legal “person.”

This separation shields your personal assets (house, car, savings) from the company’s debts and liabilities – crucial in high-risk industries like AI. File Articles with the California Secretary of State, including:

• Company name and address
• Business purpose
• Registered agent for service of process
• Number and class of shares (for corps)
• Management structure (for LLCs)

(Cal. Corp. Code § 200; Cal. Corp. Code § 17702.01)

2. Bylaws or Operating Agreement

After filing Articles, you need an internal document outlining how your startup will run from a corporate governance perspective. Corporations have Bylaws, while LLCs have Operating Agreements. This document spells out:

• Procedures for ownership meetings, voting, and record-keeping
• Responsibilities of directors and officers
• Rules for issuing stock or membership interests
• How to resolve owner disputes
• What happens if a founder leaves or the company dissolves

While not legally required, Bylaws and Operating Agreements are essential for any startup with more than one owner. They’re often requested by investors, banks, and partners.

3. Founder Vesting Agreements

In a typical startup equity split, founders receive their ownership stake upfront, subject to vesting. Vesting means the company can buy back a portion of unvested shares if a founder quits or is terminated prematurely.

Standard vesting occurs monthly over four years, with a one-year “cliff” – meaning if a founder leaves before 12 months, they keep none of their equity. After that, vesting often accelerates if the company is acquired or goes public.

Founder Vesting Agreements keep co-founders motivated and prevent them from walking away with a large equity chunk before meaningful contributions. Include vesting terms in your Bylaws/Operating Agreement or standalone Founder Agreements.

4. Intellectual Property (IP) Assignment

For tech startups, their most valuable asset is often their IP – proprietary code, algorithms, datasets, etc. Under California labor and contract law, IP rights automatically vest in the individual creator, not the company they work for. (Cal. Labor Code § 2870)

That’s why having a proper IP Assignment Agreement is crucial. It provides that all IP related to company projects will be owned by the startup, not any individual employee or contractor. All founders, employees, and contractors should sign before any work begins.

Without an airtight IP Assignment, a rogue founder could abscond with your startup’s core tech. Investors will also require a clear chain of title to your company’s IP.

5. Nondisclosure Agreements (NDAs)

AI companies often need to share confidential data and technology with employees, advisors, vendors, and potential partners. Nondisclosure Agreements (NDAs) create a legal duty not to leak or misuse private information.

A well-drafted NDA defines what info is considered confidential, how it can be used and shared, and the consequences for violation (damages, injunction, etc.). All parties with access to your startup’s sensitive data and systems should sign NDAs, including third-party contractors.

In California, NDAs cannot restrict the sharing of information about unlawful acts in the workplace – but most other confidentiality terms are enforceable. (Cal. Code Civ. Proc. § 1001)

6. Stock Purchase Agreements

Whenever your startup issues shares to founders, employees, or investors, you need a Stock Purchase Agreement (SPA). This document covers key terms like:

• Number and class of shares issued
• Price paid per share
• Representations about the company’s financials and legal status
• Restrictions on share transfers (like company right of first refusal)

SPAs protect the company by warranting buyers are “sophisticated investors” under securities laws. They also clarify employee equity incentives like stock options. Work with an experienced startup attorney to draft airtight SPAs.

7. SAFEs or Convertible Notes

Raising funding is a top priority for most AI startups given high capital needs. Newer funding instruments like Simple Agreements for Future Equity (SAFEs) and Convertible Notes have become more popular with early-stage companies and investors.

Unlike straight equity, SAFEs and Notes let investors buy shares at a discount to a future funding round. Founders avoid setting a formal valuation too early. With a SAFE, investors only get shares if and when that future round occurs, while Notes convert to equity at the maturity date or a funding trigger.

Lightly regulated SAFEs have some risks and their tax treatment is unclear. Have your SAFE or Note docs vetted by a seasoned Silicon Valley startup lawyer.

8. Software Licenses or Terms of Use

Most AI startups are developing some kind of software, whether a web app, mobile app, API, or machine learning tool. You’ll need a Software License Agreement or Terms of Use outlining how users can deploy and interact with your software.

Key terms include:

• Scope of license (commercial or non-commercial use)
• Usage limits and restrictions
• IP ownership and rights
• Liability limitations and warranty disclaimers
• Policy for user-generated data and content

Privacy policies are often wrapped in as well. With new laws like the California Consumer Privacy Act (CCPA), AI startups must give clear notice about their data practices. (Cal. Civ. Code § 1798.100)

Lay Your Startup’s Legal Foundation with TONG LAW

Getting your key legal docs in order may seem daunting – but you don’t have to go it alone. At TONG LAW, we’ve helped dozens of AI and software startups put their best foot forward while protecting founders’ interests.

From business formation to funding to commercial agreements and more, we provide tech-savvy, cost-effective legal guidance at every stage. Our team understands the unique opportunities and regulatory challenges AI companies face in today’s market.

If you’re an AI founder looking to set up your startup the right way, we’d love to learn more about your venture. Contact us today for a free consultation. Let’s safeguard your hard work and innovation, so you can focus on changing the world with your big idea.