This is the golden age of artificial intelligence for businesses. Tools that once seemed futuristic now empower teams to scale operations, enhance productivity, and outpace competitors at unprecedented speeds. Yet, despite this excitement, founders should be cautious with how their teams use these tools to scale up their business. Efficiency in the short term may come up with inevitable risks that could undermine their long-term success.
The market, however, is starting to wake up. Investors and customers alike are starting to ask the tough questions: How are startups using AI tools? Are they protecting sensitive data? Can they guarantee compliance with emerging regulations? Yet for startups without a clear AI governance framework, these questions aren’t just inconvenient – they’re a ticking time bomb.
The gap that could be costly for startups
This oversight isn’t unique to AI. It mirrors the early days of open-source software and privacy compliance. A decade ago, companies that dismissed open-source governance faced legal issues and operational headaches when it was often too late to course-correct. Similarly, privacy concerns were once brushed aside – until regulations like GDPR turned them into boardroom priorities.
The AI wave is following a similar trajectory, but the stakes are much higher. Unlike open source or privacy, AI touches every corner of a business – from how data is processed to how decisions are made. This makes the lack of governance even riskier. Yet, startups seem oblivious. According to recent research, founders rated their concern about AI risks – including intellectual property issues, liability, and regulatory compliance – at just 2.7 out of 5.
This underestimation is startling, especially considering the speed at which AI is integrating into critical business operations. Without visibility into how AI is used across teams, startups are exposed to potential data breaches, misuse of tools, and even regulatory crackdowns. Maybe even worse, they risk losing credibility with investors and clients who are already demanding answers about AI practices.
A growing demand for transparency
Today, 35% of startups report being asked by investors or clients to disclose their AI policies. This trend is only gaining momentum. Stakeholders increasingly want assurance that startups aren’t just using AI recklessly but are doing so responsibly. For founders without a clear answer, this can mean missed opportunities, broken trust, and reputational damage.
And the longer startups delay addressing this blind spot, the harder it will be to rectify. AI usage is inherently dynamic. Models evolve, tools proliferate, and data flows become more complex. Without a clear policy from the outset, startups risk creating a complex web of AI usage that becomes nearly impossible to untangle later and could potentially be illegal to use.
Turning a liability Into a strategic asset
Learning from the past, startups that addressed open source and privacy challenges early-on reaped the benefits. They avoided the chaos of reactive compliance, maintained trust with stakeholders, and positioned themselves as leaders.
AI is no different. Governance isn’t just about managing risks; it’s a chance to build trust, attract investment, and establish a competitive edge. And addressing the AI blind spot doesn’t require a complete overhaul. Startups can start small with a suitable AI policy and scale their efforts over time while reflecting such scale and efforts in a more robust and detailed AI policy. A strong AI policy should cover a few key areas.
One of them, for example, is intellectual property. Startups should define who (contractually) owns AI-generated content and how to protect it from misuse. Monitor governing law and case law to ensure your definition is legally possible. Another important aspect is privacy and ensuring compliance with existing and forthcoming regulations
For those key areas, it’s vital to keep close attention also to the Tool Management aspect, which includes the curation of a list of approved AI tools and establishing usage guidelines; educating teams on the ethical and legal implications of AI as part of the employee training; and maintaining the liability aspect by integrating ‘human-in-the-loop’ components into the riskier elements of the startups' product and services.
AI governance is on the brink of becoming a standard expectation. Startups can either lead the charge or find themselves reacting under pressure. By addressing this blind spot proactively, founders can turn a potential liability into a strategic asset, creating a foundation for long-term success.
In the age of AI, the choice is clear: govern wisely or risk being left behind.
The authors are partners at Arnon, Tadmor-Levy Law Firm, leading the emerging technologies and AI practice.
Published by Globes, Israel business news – en.globes.co.il – on March 23, 2025.
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