Artificial intelligence (“AI”) is everywhere, and it shows no signs of slowing down. Global investment in AI technologies continues to soar; in fact, funding for generative AI startups surged to $25.2 billion in 2023, nearly eight times the amount invested in 2022. The global AI market was estimated to be nearly $235 billion in 2024 and is projected to reach $631 billion by 2028. Big technology corporations, including, but not limited to, Microsoft, Cisco and IBM (“Big Tech”), are responding by building in-house AI capabilities or acquiring AI-native startups to accelerate their innovation.

For founders and leaders of these startups, this rapid growth often leads to a natural question: what are our options for liquidity or market expansion? Whether you are contemplating an acquisition, planning to raise capital, or exploring ways to monetize your intellectual property (“IP”) through partnerships or licensing agreements, the first step is always the same: due diligence.

To help you navigate these opportunities, this blog will explain the critical role of due diligence and discuss the possible implications based on real-world cases.  

What is Due Diligence and Why Does it Matter

Due diligence is a comprehensive review and evaluation of a business, typically conducted by a potential investor, acquirer, licensee, or strategic partner. It includes legal, financial, operational, and technical analysis. For AI companies, that means deep dives into your data practices, IP ownership, licensing agreements, and compliance protocols.

Think of due diligence as the audit before a major decision. It helps counterparties assess risk and confirm that your company is both valuable and well-structured. Due diligence can also help a potential partner understand the provenance of your IP. Basically, does your IP belong to you?

The more organized and transparent your operations are, the faster and more efficiently this process can move. This directly translates to cost savings, negotiation leverage, and reduced distraction for your team.

What Happens if You Are Not Prepared

Startups that begin due diligence unprepared face two common pitfalls:

• Delays that kill deals: Sloppy documentation, unclear IP ownership, or missing data can stall or even derail a transaction.
• Lost leverage: A buyer or investor might sense disorganization and use that perception to reprice the deal or demand additional terms.

Founders are often surprised by how many seemingly minor gaps, such as unclear contractor IP assignments or missing open-source license disclosures, can trigger major concerns during diligence.

In contrast, companies that proactively address these issues, even informally, stand out. Preparedness signals professionalism, maturity, and risk awareness.

What AI Startups Should Be Doing Now

Even if you are not actively seeking funding or entertaining offers, it is wise to build a due diligence-ready foundation. We recommend generative AI startups focus on the following areas:

• Data practices: ensure data sources are clearly documented, ethically sourced, and legally compliant, particularly if training AI models.
• Intellectual property: confirm that all code, models, and training datasets are owned or properly licensed. Agreements with contractors should clearly assign IP to the company.
• Governance and structure: maintain accurate cap tables, board consents, and state registrations. These are basic hygiene items that receive heavy scrutiny.
• Security and compliance: review SOC 2, GDPR, and AI-specific policies. Even if you are not yet required to comply, early attention in this area builds trust.

A Note on Real-World Examples

Two major trends are shaping the AI landscape: a surge in IP litigation and a wave of acquisitions and strategic partnerships led by Big Tech. 

One the one hand, litigation over IP infringement in data used to train AI models took off in 2023, when the New York Times filed suit against Microsoft and OpenAI for damages estimated to be in the “billions of dollars,” stemming from Microsoft’s and OpenAI’s use of copyrighted works without the New York Times’ permission. OpenAI moved to have the case dismissed, which Judge Sidney Stein of the Southern District of New York ruled against, allowing the case to move forward. Nearly two years later, Microsoft and OpenAI are still challenging the New York Times’ copyright claims. While Microsoft and OpenAI may have the resources to fight these claims and survive if they lose, these kinds of lawsuits could financially ruin a startup.

On the other hand, Big Tech looks to acquire or partner with AI-native companies. One example is Cisco’s $28 billion acquisition of Splunk, a software company that uses AI to search, monitor, and analyze data. Cisco’s planned acquisition was announced in September 2023, and the deal was completed in March 2024. Another example is IBM’s purchase of DataStax, a software company that helps developers build AI applications more efficiently. The plan to acquire DataStax was announced in February 2025, and the deal was completed in May 2025. Talk about moving fast.

Now, imagine you receive an offer for the purchase of your AI company, and during due diligence, it is discovered that your AI model has been trained on copyrighted IP without permission. Not only could this kill the deal, but it also represents a significant liability for your company. Best case scenario, the acquirer is willing to go through with the deal after you get usage rights from the owner of the copyrighted IP, which will likely come with a hefty price tag. Worst case scenario, the deal falls apart and the IP owner sues you for infringing their rights. 

Would you prefer dealing with the expense and time of a lawsuit like the one between OpenAI and Microsoft, or enjoy the quick and less complicated closing of high valued deals in a matter of months, like Splunk and DataStax? Being properly prepared for due diligence can help you avoid wasting precious time and resources on lengthy trials and lawsuits. 

Readiness as a Strategic Advantage

Whether or not an acquisition or funding event is on the horizon, it pays to plan as if it is. Preparing for due diligence should be part of your company’s core operating rhythm. It should not be a fire drill when opportunity knocks. At Bagchi Law, we work with AI-native and tech-forward companies across all stages of growth. We help founders mitigate risk, navigate regulatory complexity, and align their legal posture with strategic goals. If you would like guidance in preparing your company for due diligence, contact us for a consultation. 

Eager to learn more about due diligence? Here are some additional resources from our blog:

• Mastering Due Diligence: A Guide to Strategic Record Keeping
• How Startups Can Navigate the Due Diligence Process With Ease