Welcome to Degen Lawyer's Newsletter, where we bring you your weekly dose of legal insights, and regulatory updates in the emerging tech and law space. Our expert lawyers serve up curated analysis, hot takes, and expert commentary, sprinkled with a healthy dose of wacky and meme-worthy content. Enjoy!

In this week’s edition:

News in short:

1. Singapore developing Generative AI (GenAI) risk framework for the financial sector

   AI x Finance - The crossover we’ve all been waiting for is here! The Monetary Authority of Singapore (MAS) has announced the successful completion of phase one of project MindForge (a risk framework for the use of GenAI in the financial sector) supported by a consortium of banks, technology companies and the government. The aim of the framework is to help financial institutions identify and manage risks. After getting its fingers burned by Terra and Three Arrows Capital (3AC) Singapore has adopted a cautious approach to AI policy in the financial sector, how this unfolds could very well shape global policy.

2. France, Germany and Italy declare war on EU’s AI Bill.

   Europe’s three largest countries have positioned themselves firmly against the rest of the EU in one key proposal in the proposed AI Act. The Act intends to add additional obligations and requirements for foundation model development. A ‘foundation model’ is a type of machine learning model that forms the base for the infrastructure of large language models (LLM’s) like Open AI’s ChatGPT and Google’s Bard. Certain obligations would apply only to such LLMs such as compulsory testing by third-party experts. Thus proposing a two-tiered set of rules. The trio of countries has opposed this two-tiered regulation, fearing that this would lead to EU being left behind in the global arms race to AI dominance The deadlock could even mean the end of talks on its Artificial Intelligence Act altogether. They have come out extremely strongly against this making political statements to the effect. A usually united EU is showing cracks in its armour and being a world leader in AI reg, this could have far-reaching consequences.

   

Article of the week

Why do founders get fired?

Nearly half of the founding CEOs get fired from their companies within 18 months of their Series A funding. A prime example is Steve Jobs, founder of Apple. Jobs, after a power struggle with his board, was dismissed. It took 11 years of the company floundering to bring him back to the helm. However, most founders don’t get a second shot. Could Sam pull a Steve?  

But first let’s break down why its so common for founders to get the boot.

This happens primarily because most founders are not equipped to adapt to changing roles as their companies scale. If a company becomes massively successful, its founders are at a greater risk of being fired. Most companies start with the founder in the trenches, hustling and doing the grunt work, clawing customers, and ensuring the bills are paid. But once the business scales, a CEO or a founder can no longer do business ‘as usual’. They have to start thinking like a CEO and design the environment to achieve the goal instead of working on the goal itself. This means hiring people to do things that focus on the larger picture of the business, and most founders simply cannot fit into this new role. Founders are unable to delegate because they often simply don’t know how to! While they might bring the company from a position of absolutely nothing to worth a few million dollars, they are often not the right person to take it from a valuation of a few million dollars to hundreds of millions of dollars, this is due to the fact that it takes a very different skill set to build the company from scratch and to run a business with several hundred employees.

A disconnect with the board or venture capital (VC) investors is also a leading reason. As far as VCs go, many founders do not realise that money comes with strings attached (DUH!).

It can mean answering questions about quarterly returns or even shifting the direction of the focus of the company, sometimes at the cost of the founder’s vision. This often barrels into a situation of mismatched expectations, leading to a breach of a fiduciary duty or a general lack of confidence in a founder’s ability to function, leading to difficult situations, ultimately ending in dismissal. In simpler terms, if the founder burns cash quicker than the plan without telling anyone why, they’ll exit the company quicker than planned. There could be other reasons for this phenomenon, too. A founder might have been convicted of a crime; perhaps the company structure facilitated it, or maybe the founder was too overwhelmed to handle more once their company grew. The critical takeaway is that it happens often and will continue to, except in those rare cases where a founder can seamlessly synergise with the board and investors, simultaneously adapting to the roles they are thrown into depending on where the company is at, growth and valuation-wise.

This does not suggest that investors or board of directors prefer firing founders. However, the devil lies in the details. A replacement must be sought and hired, which is costly and time-consuming and comes with its own set of risks.   

Of course, the most recent and public example is the sage at Open AI. The board of OpenAI fired Sam Altman as they had ‘no confidence in his ability to lead OpenAI’, stating that he was not completely candid in communications with them.

In this case, the structure of OpenAI itself facilitated the divorce. OpenAI was initially set up as a non-profit in 2015, dedicated to advancing digital intelligence for the benefit of humanity. A board of directors was set up with vast powers, whose purpose was to run the organisation in harmony with its altruistic goals.

When its funding commitments came short of what was required, OpenAI transitioned to a non-profit in 2019, inviting investors to raise capital. The catch for investors was that any profit distribution was capped at 100x, with any surplus retained by OpenAI. Such a structure preserved its non-profit core while raising the much-needed capital. Despite such an overhaul, the board continued to maintain control over OpenAI’s and its subsidiaries’ operations, remaining a non-profit whose primary purpose was to serve its mission – ‘safe AGI(Artificial General Intelligence) that is broadly beneficial’. The intended beneficiary is humanity and not its investors. The board majorly constitutes independent directors who do not hold any equity in OpenAI.

The Board reportedly disagreed with Altman’s ambitions of commercialising the company, which included investments from Middle East & Softbank. His plans for the company were not in line with Open AI’s mission statement. Given this (rather major) difference of opinion, the Board used its powers to remove Sam.

As for Sam, after being fired over a video conference, he expressed his shock and discontent. Open AI’s most significant investors and supporters, notably Microsoft, want Sam Altman back. However it got even wilder, up to 700 employees, (more than 90% of the workforce) have also threatened to resign if he isn’t brought back. In recent news, Microsoft has hired him as CEO of its Advanced AI Research Team. The unfolding events will play a pivotal role in determining the pioneer's future in generative AI. Now, the world is bracing itself, popcorn in hand, waiting to see what will happen next.  

Did You Know?

Sam Altman is doomsday prepper, with a stash of gold, guns and gas masks! He even has a big patch of land in Big Sur in The USA where he can hide out in case of an apocalypse. He is quoted to be freaked out by the concept of the world ending and he listed out a few scenarios as examples, like a “super contagious” lab-modified virus “being released” onto the world population and ofc, the more relatable “AI that attacks us”.

While we love Sam Altman for ChatGPT, it’s ironic that he couldn’t survive his ouster from the company he founded!!

Guess you have to prepare to survive what’s coming at you.

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