AI is remarkable. It can brainstorm recipes, summarize a 100-page purchase agreement and produce a sonnet in perfect iambic pentameter about how retailer deductions and chargebacks are destroying your accounts receivable before your coffee cools.

But asking AI to draft or review your startup's legal documents is a bit like asking a golden retriever to perform dental surgery: enthusiastic, fast and very unlikely to carry malpractice insurance.

With the rise of AI and its somewhat convincing ability to draft legal documents, I’ve recently worked with founders who have used AI to prepare their company's formation and equity documents and only approach us when preparing to raise seed-round financing. The story here has repeatedly been eerily similar: the company has promising technology; a lead investor is interested; and the term sheet is nearly ready to be signed. Then, lawyers were brought in and investor counsel asks to review the company's corporate documents...

That’s inevitably where the deal would hit the brakes.

Where AI May Fall Short During Startup Formation

At first glance, the AI-generated documents can look plausible to the untrained eye. But once counsel starts reviewing them, the problems are obvious. They’ve tended to fall into a few buckets:

• Ambiguous equity arrangements: In one instance, the company was not even a party to the stock purchase agreement for the founders. That raised a basic but alarming question: who actually issued the shares?
• Unclear IP ownership: In most other cases, there was no clear intellectual property assignment from the founders to the company. For a technology startup, that is not a technicality. It goes directly to what the company owns and what investors are actually financing.
• Unusual vesting schedules: Finally, the vesting schedules tend to be bespoke, unusual and potentially problematic from a tax perspective. Among other issues, a recurring question has been whether 83(b) elections had been properly handled.

For these founders, a handful of cost-saving prompts had created cleanup projects that were more expensive, more stressful and more deal-sensitive than a proper incorporation would have been in the first place.

Fortunately, in each case, the founders called before the situation went completely haywire. Because we have  good working relationships with the investors’ counsel from prior deals, we were able to provide assurance that any issues would be fixed promptly and correctly without turning the financing into a prolonged diligence exercise.

That is another thing AI cannot yet replace: judgment, reputation and deal relationships.

AI is a Tool, Not a Substitute for Legal Counsel

Now, a founder reading this may think, “Of course, the lawyer is telling me not to use AI for legal documents.”

Fair enough. But the point is not that founders should avoid AI. The point is how they use it.

In a legal practice, AI can help automate certain processes, compare drafts, flag potential inconsistencies and improve efficiency. But those tools sit on top of forms, workflows and judgment developed by lawyers who have spent years working with startups, venture funds and investor counsel. The work is still reviewed by people who are accountable for the result — and that’s the right model for founders as well.

Use AI as an Assistant, Not as Your Attorney

Use it to explain unfamiliar terms. Use it to summarize a draft for business review. Use it to prepare questions for counsel before a call.

But we’d strongly caution against relying on AI as the final drafter or reviewer of documents that affect your cap table, ownership, liability, employment relationships, privacy obligations, intellectual property, tax position, or anything else you would be uncomfortable explaining later to an investor, board member, insurer or judge.

The Importance of Getting Formation Documents Right

Startup legal work is not just paperwork. It is infrastructure. Your incorporation documents, equity grants, IP assignments, board approvals, commercial contracts and financing documents form the foundation on which your company is built. If that foundation is cracked, the problem may not show up immediately. It may surface at the worst possible moment: during a financing, acquisition, dispute or diligence review.

For founders, the real question is not whether AI can produce a document that looks legitimate. The better question is whether the document does what it needs to do when someone is reviewing it closely. The solution: hire the lawyer, so the AI-generated clause that appears innocuous on its face doesn’t kill the deal, cloud your ownership or spook the investor.

Your future self, your shareholders, your insurer — and possibly, your golden retriever — will thank you.