This guide is for informational purposes only! During Outside LLMs we are providing support in #legal-support-sparring for ad-hoc questions and legal curiosities. For lengthier questions, research and drafting we can set up a call – just let us know here to be connected to one of our US attorneys. 

Key areas to keep in mind as a startup 

We get it. You have a new problem to solve and have identified generative AI is the best solution. It’s time to get building! 

But like all other aspects of creating a business, legal plays an important role. Below are just some questions you should ask when building a tool that utilizes AI. 

1. Incorporation: Forming a corporation is an important step even for sole entrepreneurs as it will protect you from any liability. This involves creating bylaws, which are the internal rules of the corporation, and holding the first meetings of the board of directors and the shareholders.
   
   In the US a Delaware corporation is typically the most popular form of entity for startups. You can use a service like Stripe Atlas to do this or completely outsource the process to our team. 

2. Risk Disclosure: When raising funds, it’s crucial to disclose all the risks associated with the investment. This can be done through a risk factor disclosure document. This helps protect the company from future claims by investors who might say they were not aware of the risks.

3. Intellectual property and branding: While you’re perhaps familiar with pivoting and failing fast, don’t overlook the value of your branding. We recommend checking for the availability for a trademark for your logo – our sister company provides a free verification service here. Once you know you will go ahead with the brand, you can proceed to registering the trademark.
   
   There is also value locked into the lines of code behind your tool. In some cases protection of this asset is achieved through trade secrets or patents. 

4. Founders relations: Like any long term commitment, even friendly co-founders have the practical side of their relationship on paper. One way to achieve this is through drafting a Founders Agreement that outlines the responsibilities of each founder, the goal of the company, and the mechanism if a founder wants to leave. It is recommended to have this in place from the start, even if the founders are close friends or family. This agreement can help prevent misunderstandings and disputes down the line.
   
5. Corporate Governance: It’s important to remember that the company is a separate entity from the founders. Regular corporate governance activities, such as annual elections for directors and maintaining annual minutes for directors and shareholders, should be carried out. This helps maintain the distinction between the company and its founders, which can be crucial in case of a lawsuit
   
6. Fundraising and Securities Law: When starting a startup, there will be a certain amount of shares available. These shares can be allocated to founders, potential future founders, investors, and employees. Early employees may receive larger amounts of equity due to lower salaries. It’s important to understand that giving out shares involves securities law, and there are regulations to follow when raising funds.
   
7. Crowdfunding: This is a popular way to raise funds, especially for startups. It involves using a funding portal registered with the SEC. There are limits on the amount that can be raised and the amount that non-accredited individuals can invest. There are also disclosure requirements. Crowdfunding can provide good exposure and attract investors.

Intellectual specifics for generative AI music startups 

Intellectual property – who owns what is generated 

Creativity and innovation are the secret ingredients that differentiate a startup from the competition. When researching and developing your products, you create irreplaceable assets in the form of intellectual property (IP), the value of which is understood by investors, clients and competitors. Diligent IP protection will help you build strategic partnerships and attract investment. For companies that want to make long-term progress, IP protection is a matter of survival.

You should think about the optimal strategy for protecting your IP right from the start of your business. The most common mechanisms of IP protection are copyright, trademark and patent or utility model.

What is copyright? 

For generative AI creations, copyright is perhaps the most important area of intellectual property to consider. 

Copyright is granted to protect creative works including literacy, music, film and written content. In the generative music space this includes the input of music being created. Unlike trademarks and patents, copyright does not need to be claimed and arises at the creation of a new work. In practice, if you are therefore using a snippet of a current song to generate a new AI generated composition, this current song will be copyright protected. 

Under US copyright law, usage of copyrighted work will not be an infringement if the output is [in legal terms] meeting ‘fair use’. Fair use is assessed based on four criteria which the court weigh up under 17 U.S.C. § 107: 

• Purpose and character of the use, including whether the use is of a commercial nature or is for nonprofit educational purposes: “Transformative” uses are also more likely to be considered fair. Transformative uses are those that add something new, with a further purpose or different character, and do not substitute for the original use of the work.
• Nature of the copyrighted work: does the work that was used relate to copyright’s purpose of encouraging creative expression? Factual work is more likely to be found as fair use. 
• Amount and substantiality of the portion used in relation to the copyrighted work as a whole: Courts weigh this by looking at how long the section used is and whether the section used goes to the heart of the work. 
• Effect of the use upon the potential market for or value of the copyrighted work: does the unlicensed use harm the existing or future market for the copyright owner’s original work? Could it harm the work if it was widespread? 
  

In general, if you use protected content, do not transform the initial content into something new for a commercial purpose, it is more likely infringement will be found.

DMCA takedown requests 

As a founder of a generative music platform, AI startup or business leveraging LLMS, you may find yourself facing unexpected Digital Millennium Copyright Act (DMCA) takedown notices. This happens when someone believes that your game, music or content infringes on their copyright and requests that the platform hosting your game or content, such as Steam or YouTube, take it down.

In practice requests can occur if you create a work (e.g a game, music or other creative endeavor) without obtaining the proper license of the original holder. The copyright holder of the music may file a DMCA takedown notice with the platform where your game is hosted, such as Steam, requesting that it be taken down because it infringes on their copyright. If the platform receives the notice and determines that it is valid, they may remove your game from their platform and notify you of the takedown.

The primary objective of DMCA takedown notices was to protect digital content and prevent copyright infringement online while also providing protection to platform operators against a multitude of potential lawsuits they could face. Failure to act on DMCA notices could potentially result in legal action being taken against the platform operator for allowing copyright infringement to occur on their platform. In most cases, this means that platforms are more likely to automatically take down the content rather than conduct a thorough validity assessment.

General tips on how to avoid and deal with DMCA takedown notices:

Prior to a DMCA takedown notice:

1. Obtain proper licenses: To avoid DMCA takedown notices, ensure you have the correct permission for all copyrighted materials used in your games or content.
2. Monitor your content: Regularly monitor your game or content to ensure that it does not infringe on anyone’s copyright. If you receive a DMCA takedown notice, review the notice carefully to determine if it has merit.

Following a DMCA takedown notice:

1. Act swiftly. Each day prolongs the process and increases damage.
2. File a counter-notice.If you receive a DMCA takedown notice that you believe (strongly) is incorrect, file a counter-notice promptly. This will allow you to contest the notice and potentially have your game or content restored to the platform.
3. Seek legal assistance. If you are unsure how to handle a DMCA takedown notice, seek legal assistance from a qualified attorney with experience in intellectual property law. A properly written and addressed counter-notice can speed up the whole process, and you can obtain more information if the takedown notice is valid or unfounded.
4. Communication with your community. Avoid communicating anything about the situation that could be used against you in the future, such as sharing the counterparty’s personal data, sharing inaccurate statements. It’s usually sufficient to post that you’re addressing the situation during the counterclaim period and only comment with more information and a calmer head.
5. Communication with the counterparty. It’s important to at least try to communicate with the other party, even if it may be unpleasant. Negotiating an agreement is almost always a quicker and more cost-effective solution than litigation.

Common questions on handling a DMCA notice: 

Q: Can I simply file a counter-notice to contest a DMCA takedown notice and have my game or content restored to the platform without any further issues?

A: While filing a counter-notice is an option for contesting a DMCA takedown notice, it may not necessarily provide a guaranteed solution without any further issues. There are potential risks involved such as the possibility of facing legal action or penalties if the counter-notice is filed and it is discovered that you knew that you were infringing on someone’s copyright. It is important to carefully evaluate the situation and seek legal advice before deciding whether to file a counter-notice to protect your rights and interests.

Q: What does it mean when a developer or content creator consents to jurisdiction in the U.S. Federal District Court?

A: By consenting to the jurisdiction of the U.S. Federal District Court where you are located, you are agreeing to submit to the court’s authority and jurisdiction over any legal disputes related to the DMCA takedown notice. For European developers or content creators, this may involve agreeing to the jurisdiction of the court where the platform is located (District Court for Western Washington) and potentially having to fight your case in the US. This is the case for example with Valve, the owner of Steam. 

Before deciding whether to defend yourself in court, it is crucial to carefully consider the potential legal and other costs involved.

Q: What happens if the copyright holder files a lawsuit during the 14-day period after the DMCA counter-notice has been filed?

A: If a lawsuit is filed within the 14-day window, Steam may keep the game or content down until the trial’s conclusion. The judge may also order the platform to take certain steps such as restoring or keeping the game off the platform during the litigation or withholding the developer’s profits as collateral for legal fees. However, it’s uncommon for the copyright holder to file a lawsuit after the counter-notice has been filed, unless there is a clear case of copyright infringement.