Imagine you're the founder of a SaaS startup preparing to sign its first enterprise customer. You need to draft your company's standard services agreement, and decide to use a popular AI tool to draft the agreement. 

The AI produces a professional looking agreement, covering payment terms, termination, confidentiality, intellectual property, and liability. Everything looks professional, and you send it off to your client. 

However, as part of its service, your startup handles customer data. You never considered the additional questions that arise around data processing, security obligations, breach responsibilities, and what happens to customer data when the relationship ends. 

The contract you had AI generate, and that your customer has now signed, doesn't address these issues. The problem isn't that AI necessarily gave you an incorrect output. The issue is that you didn't know what you didn't know about data processing. 

A technology lawyer might have recognized that need and asked important questions of their client. 

AI can do many things. It can draft, analyze, summarize, and identify potential issues based on the task it is given. But without sufficient information about your business and the transaction, AI may not recognize all of the legal issues that need to be addressed. 

This hypothetical is a good example of the risks of AI-generated contracts, and the limitations of AI in law. Generating a contract isn't the same as understanding what the contract should accomplish. 

Will AI replace lawyers some day? No one can say for sure. But in today's world, human judgment from an experienced professional in legal practice still remains invaluable for businesses. 

What AI Can Actually Do for a Startup

With AI's prevalence, it's natural to ask what it can actually do for your startup, particularly from a legal standpoint. And there are several viable use cases. 

Most startups don't have an in-house lawyer at an early stage, but they still have plenty of legal issues that could become expensive problems if not properly addressed. AI doesn't eliminate the need for an actual human lawyer, but it can help founders with preliminary legal research. It can explain complex legal and contractual issues in plain English. AI doesn't always get the information 100% correct, or address nuances learned from personal experience, but it can still be useful for exploring unfamiliar legal concepts.

AI contract drafting is another area where startups are using the tools they have to generate first drafts of NDAs, service agreements, software licenses, terms and conditions, and other common business contracts. Using AI to generate a first draft of these documents is useful, but it can still make mistakes. For contracts that create significant legal or financial obligations, startups should not assume an AI-generated document is ready to be signed without review by a human lawyer. 

Other areas where AI can be useful include summarizing long agreements, flagging potentially unusual provisions, and comparing two versions of a contract and identifying changes. 

The biggest advantage of using AI in a startup's legal concerns is that it can save significant amounts of time on repetitive document work. It can give a business owner a starting mental framework for understanding complex legal topics that they might otherwise not know anything about. 

But AI's ability to produce or analyze legal documents doesn't mean that it understands the business decisions behind those documents. That's an important distinction. AI can write a contract, but a lawyer needs to understand the underlying decisions behind that contract.

Drafting a Contract Is Not the Same as Making the Right Business Decision

AI outputs are often only as good as their prompts. You can tell an AI to “draft a contract that protects my startup" and it will try to interpret what that means. But without knowing what risks your company is willing to take, what goals you're trying to accomplish, and what concessions you're willing to make, the AI may produce a generic solution that doesn't reflect your company's actual needs.

Imagine you're trying to draft a contract around IP ownership. You prompt an AI to create a draft, but it doesn't know anything about the IP you're trying to protect or what rights your customers actually need. It can explain different approaches to ownership of modifications and improvements, and draft provisions addressing them.But it cannot reliably determine which approach is right for your company without understanding your underlying business objectives. The answers to these questions require understanding your company's goals, risk tolerance, negotiating position and the specifics of the transaction. 

Then there are legal questions that a founder might not even know they have. If you don't know that a particular legal issue exists, you can't ask AI a question about it. 

That's a key difference between AI legal advice vs lawyer. An experienced lawyer can recognize issues that their clients have never considered, while an AI may not identify the question you didn't know you needed to ask.

The Limitations of AI in Law

AI can be a powerful tool when it's used appropriately. But startups and businesses need to understand its limitations and know that it is not a substitute for a human lawyer's knowledge and experience. 

These are some of the most important limitations startups should understand when relying on AI for legal work.

AI Can Get the Law Wrong

Generative AI tools are capable of producing answers that sound confident and well informed. However, no AI system currently available can guarantee the accuracy of every output. AI systems can suffer what are known as “hallucinations”, confidently presented information that is inaccurate or even completely fabricated. They can cite non-existent cases, misinterpret legal standards, overlook relevant statutes, and rely on outdated information. 

Even if an AI-generated answer is fundamentally correct, that does not guarantee that it accounts for the laws of your specific jurisdiction or the legal considerations unique to your company.

That risks giving founders who rely on AI instead of a human attorney a false sense of confidence. Simply because the AI sounds confident doesn't mean that it has applied the same level of legal scrutiny that an attorney can.

A Contract Can Look Right, but Be Very Wrong

Some of the risks of AI-generated contracts aren't easy to spot. The contract may look like it contains all the right provisions, but it can still allocate risk poorly, contain provisions that are unnecessary, or leave out issues that should have been addressed. 

Without human judgment and legal expertise, these omissions may be difficult for a founder to identify. The problem could go unnoticed until the company faces a dispute or an event triggers a provision in the contract, creating significant consequences.

What Happens to Confidential Information?

Startups using AI for legal work should be aware of the potential confidentiality issues that it raises. Business contracts can contain proprietary information, customer data, financial information, trade secrets, and other sensitive material. When they upload that information to an AI service, they need to be aware how that platform handles submitted data, including how it retains, uses, and secures that information. 

Uploading confidential agreements into an AI system and asking it to analyze them can create data exposure risks that go beyond whether or not the AI can provide an accurate legal analysis. 

AI Should Assist With Legal Decisions, Not Make Them

The limitations of AI in legal work don't mean that startups should avoid these tools. On the contrary, they can be extremely valuable tools for explaining unfamiliar legal concepts and identifying issues for further review. 

However, companies that treat AI-generated contracts or answers as equivalent to advice prepared by an experienced legal professional may be taking significant and unnecessary risks. 

AI can help you understand a contract, but an experienced lawyer can help you understand what that contract means for your particular business. That's a distinction that shouldn't be ignored. 

What a Business Lawyer Actually Does for a Startup

If an AI can create an initial draft of a contract in seconds, what is a startup actually paying a lawyer for?

The answer isn't necessarily the document itself. The value a business lawyer brings is the judgment, context, and strategy they bring to decisions behind that document. 

A lawyer helps their clients evaluate the risks they are taking with the contract. A lawyer can take into account the company's business model, technology, industry, customers, investors, and long-term goals. A lawyer doesn't just identify problematic language. They help determine whether the risk is worth the reward, and what protections the company should seek in return. 

That perspective is invaluable during negotiations. It's not that every risky provision should be rejected. A lawyer can help you determine what to fight for, and where to compromise. They can also identify provisions that could create significant exposure later. 

There's also an important distinction between AI legal advice vs a lawyer. A lawyer has professional obligations concerning competence, confidentiality, and the protection of information relating to the client's representation. An AI system does not assume the professional responsibilities of an attorney for the legal advice or business decisions that result from its output.

Hiring a lawyer isn't simply about having someone write a contract or answer your questions. A lawyer helps you strategically determine what a contract should accomplish, what risks you should accept, and how those decisions support your long-term business goals. That level of context and professional judgment is something that a startup should not assume an AI system can reliably provide on its own.

AI Is a Powerful Tool–But It's Not a Complete Legal Strategy

Will AI eventually replace lawyers? It's impossible to look far enough into the future to say whether that is a realistic outcome. But over the next 10 years, AI will likely become even more capable at contract drafting, legal research, and document review. 

Routine legal work will become increasingly automated, and even lawyers themselves will increasingly use AI as part of their workflow. But that is still a different outcome from replacing the lawyer a startup relies on to make consequential legal decisions.

Startups and other businesses should understand that while AI can help them understand legal issues and concepts, and even generate agreements, there is still no substitute for human judgment in legal practice.

A lawyer can help you understand what your company needs, what risks it should accept, and what it should negotiate. Crucially, a human lawyer can also help you identify issues you may have overlooked and explain the consequences of different decisions. 

AI can draft a contract, but it can't replace the role of a lawyer in helping you make the right legal decisions for your business. 

Thinking about using AI to handle your startup's legal needs? SVTech can help you use that technology effectively, while providing the experienced legal judgment you need to make informed business decisions.

Contact SVTech today for an initial consultation.