Startups in the legal gray area: permissibility and limits of innovative business models

Innovative start-ups sometimes operate in legal gray areas – areas in which the business model is not clearly prohibited by law, but also not clearly permitted. Founders ask themselves whether and to what extent they are allowed to exploit such gray areas in order to implement new ideas. This article comprehensively analyzes the legal, economic and moral aspects of this topic. Practical examples – from hosting platforms with copyright-infringing content to AI applications and international business strategies – are used to illustrate where the legal boundaries lie and what opportunities and risks are associated with the deliberate exploitation of legal loopholes. Finally, the role of a German lawyer as an advisor is examined and whether he is allowed to support start-ups in such projects or must exercise particular restraint.

Hosting services and copyright infringements: Between “Stoererhaftung” and a legal business model

A typical example of a business model in the gray area is hosting services or platforms where users can upload content. This may include content that violates copyright law – such as pirated copies of films, music or software. The operators of such services do not provide the content themselves, but offer the infrastructure for it. Are start-ups allowed to operate such platforms without being liable for users’ infringements? The answer depends on the legal liability rules and the specific design of the service.

Liability privileges for host providers and German “Stoererhaftung” (Breach of Duty of Care)

In purely legal terms, special liability privileges apply to hosting providers in Germany (and the EU). According to the European E-Commerce Directive (2000/31/EC), implemented in Germany primarily in the Telemedia Act (TMG), service providers who store third-party information for users(hosting) are exempt from responsibility for this content under certain conditions. In particular, Section 10 TMG states that a hosting provider is not liable for damages for illegal information stored by users as long as it has no positive knowledge of the illegality. However, if they do become aware of it (e.g. through a complaint from the rights holder), they must take immediate action and remove the content or block access in order not to lose their privileged status. This principle corresponds to the internationally known “notice-and-takedown” procedure.

It is important to note that the privilege initially protects against claims for damages and criminal prosecution. However, for a long time, rights holders in Germany were still able to enforce so-called injunctive relief against host providers. This is where ” Stoererhaftung ” comes into play – a concept developed in German civil law that makes it possible to make a claim for removal or injunctive relief against someone who is not the perpetrator or participant in an infringement, but who has in some way intentionally and adequately-causally contributed to the infringement.

According to the established case law of the Federal Court of Justice (BGH), a service provider is only liable for injunctive relief if it has breached reasonable inspection and monitoring obligations. This means that a startup that operates a hosting platform is not automatically responsible for every copyright infringement committed by users. Only if the operator has concrete evidence of a clear infringement and still fails to act can they be liable for injunctive relief. The Federal Court of Justice has formulated that the breach of reasonable inspection obligations is a prerequisite for liability for interference. Reasonable means: what the operator can reasonably be expected to do technically, organizationally and economically in view of his business model without endangering his business model itself.

As an example, in a decision from 2011 (“Blogspot” case, VI ZR 93/10) on the liability of a blog host due to violations of personal rights by user posts, the Federal Court of Justice stated that a host provider is only responsible from the time it becomes aware of the legal violation. The complaint of an affected person must be so specific that the infringement can be easily confirmed; the host provider must then check the content and delete it if necessary. Applied to copyright infringements, this means that as long as there is no knowledge of a specific copyright infringement, there is generally no obligation to proactively filter all user content for infringements. The operator only has to react if there are indications (e.g. notifications from rights holders).

BGH case law: “Alone in the Dark” and “RapidShare”

For copyright infringing content on file hosting platforms – a common scenario with so-called one-click hosters such as the former RapidShare – the Federal Court of Justice (BGH) established guidelines in the cases “Alone in the Dark” (judgment of 12.07.2012, I ZR 18/11) and “File-Hosting-Dienst” (also “RapidShare”, judgment of 15.08.2013, I ZR 80/12) as to when a hosting service becomes a disturber and which verification obligations are reasonable. These decisions are important for startup founders who want to operate similar platforms:

• Notice-and-takedown: As soon as the operator receives notification from the rights holder of a specific copyright-infringing file, they must delete or block it. Simply responding to notifications is the minimum obligation.
• Eliminate the risk of repetition: The host must take precautions to ensure that the exact same content is not immediately uploaded again. In the RapidShare case, it was required to automatically filter out identical copies that have already been identified as illegal in future. For this purpose, the use of hash value filters or file name filters may be reasonable in order to block duplicates of files that have already been removed.
• Known judgments: The BGH considered it reasonable for the service to actively monitor certain external link collections or relevant websites on which users share links to the hoster’s files (so-called warez or link portals). If the host provider finds links to illegal copies there, it must take independent action and remove these files. However, the BGH limited the scope: it is sufficient to monitor a few portals known to be relevant (a single-digit number was mentioned). An obligation to search the entire Internet would be disproportionate.
• No obligation to check all uploads in advance: The courts emphasized that the essence of the business model – in this case an open cloud storage service – must not be destroyed by excessive obligations. This means that a startup does not have to check every single user upload for copyright infringements before publication; this would be neither practical nor economically reasonable and would significantly hinder legal uses. The balance must be right: sensible measures against obvious abuse, but no monitoring obligations that paralyze the overall offering.

This case law shows the gray area: A file hosting service is legal in itself and is also used by many users for legitimate purposes (data backup, own file exchange). At the same time, it can be used for illegal file sharing. The startup is somewhere in between: It is allowed to operate the business model, but it has to live with legal boundaries and implement certain due diligence measures. If it oversteps the boundaries – for example by ignoring warnings or deliberately promoting copyright infringements – there is a risk of injunctions and the legal shutdown of the business through injunctions or cost-intensive court proceedings. In serious cases, even criminal aiding and abetting could be involved (e.g. if the operator actively provides piracy-promoting tools and is complicit).

Economic considerations: Benefits and risks of the gray area

From an economic point of view, the initial tolerance of infringements on a platform can be tempting: Illegal copies of popular movies or music attract a lot of users and can rapidly grow a new hosting or streaming portal. Some now established platforms have historically become just as big – YouTube, for example, was flooded by users with TV recordings and music videos in the early years before systematic content ID filters and license agreements with rights holders were introduced. From a founder’s perspective, it may seem attractive to build up reach first and worry about legality later.

However, the risk is considerable: rights holders (e.g. film studios, music labels, software manufacturers) monitor the market closely and are often quick to take action against new services that infringe copyrights. Warning letters, injunctions and claims for damages can overburden a young start-up financially. Unlike a globally financed corporation, a start-up rarely has the resources for lengthy legal disputes. If an injunction is issued, the service may have to immediately shut down certain functions or remove content – which annoys users and slows down growth. In the worst-case scenario, the service could be shut down completely. In addition, ongoing proceedings deter investors; capital providers shy away from the legal risk if it is unclear whether the business model is sustainable in the long term or can be legally upheld.

Another economic risk is reputation: if a platform operator is publicly branded as a “piracy portal”, this can put a strain on relationships with business partners. Payment providers, advertising partners or app stores may be reluctant to work with such a platform. Reputable advertisers usually avoid appearing on websites with illegal content. For the startup, this means potentially fewer sources of revenue. There is also a risk of being blacklisted (e.g. US watchlist for piracy websites), which can generate international pressure.

Legal gray area or clear lines? – Moral and legal-ethical aspects

Although the operation of a hosting service is legal in itself, the moral question arises as to whether founders should consciously accept that the rights of third parties are infringed via their platform. On the one hand, it could be argued that the operator is merely providing a neutral tool (similar to a telephone provider, whose lines could also be used for illegal calls without the provider being held responsible). On the other hand, an operator that advertises in a certain scene or hardly takes any countermeasures naturally knows that its service is primarily used for illegal purposes – this would be morally questionable, as it profits from the injustice of others.

This is precisely where the liability for interference in Germany attempts to strike a balance: An entrepreneur should be allowed to pursue innovative storage or communication services without being immediately liable for any misconduct by third parties. But the legal system demands responsible behavior: Reasonable precautions as soon as infringements of the law are recognizable. Morally, this is common sense: if I see that my product is being misused to cause damage to third parties, I should at least do what is necessary to prevent further damage.

Founders can also position themselves ethically by demonstrating proactive compliance: e.g. a clear ban on illegal content in the terms of use (under contractual law, this can later be important in order to prove that legal violations were not tolerated in the event of recourse claims by users). Setting up a clear reporting procedure (so that authors can easily report legal violations) is also part of responsible business conduct. Some start-ups even voluntarily enter into partnerships with rights holders, offer licensing models or revenue shares – which leaves the gray area and transfers to legal use.

Last but not least, it must be borne in mind that the legal situation can change over time. What is a gray area today may be regulated by law tomorrow. In the area of hosting and copyright law, there have been efforts at EU level in recent years to make large content sharing platforms more accountable (keyword: upload filters and Article 17 DSM Directive). Although such strict obligations are primarily aimed at platforms with market power such as YouTube & Co, the trend is towards decreasing tolerance for illegal content. A business model that is mainly based on legal loopholes is therefore on shaky ground.

Interim result: Start-ups are allowed to operate hosting platforms, even if users could theoretically upload illegal content – the model itself is legitimate. However, the founders are operating in a gray area that requires constant vigilance. Legally, clear duties of care must be observed (notice-and-takedown, filter systems within reasonable limits, monitoring of known illegal sources). Economically, it is important to weigh up whether the benefits of rapid growth outweigh the risk of early legal conflicts and reputational damage. Morally, entrepreneurs should ask themselves whether they are willing to actually infringe the copyrights of third parties and whether they are prepared to take responsibility as soon as abuse becomes apparent. Responsible founders will build in mechanisms from the outset to curb infringements and thus demonstrate that their innovative business model can be scaled sustainably and in compliance with the law.

AI applications and training data: Copyright gray areas and disruptive effects

Artificial intelligence (AI) applications, in particular machine learning models based on large amounts of data, are a current field with considerable legal gray areas. Start-ups in the AI field – for example in the generative AI sector (text generation, image synthesis) or intelligent analysis systems – are faced with the problem that the training data they use is often the existing work of others: Texts, images, code or music, which may be protected by copyright. The central question is: Is it legally permissible to use copyrighted material to train an AI without the consent of the rights holder? And further: What disruptive effects does this have on existing business models, and how should this be assessed morally?

Legal situation: Text and data mining between permission and interference

Traditionally, copyright law required the consent of the rights holder for any reproduction or processing of a work, unless a limitation provision (statutory exceptions) applies. The training of AI models typically requires the copying and analysis of huge amounts of data. For example, a machine learning algorithm can download millions of images from the internet and “learn” a model from them. From a legal perspective, copies of the images are made (even if they are only stored temporarily or in a derived form in the AI model), which may constitute an infringement of the right of reproduction (Section 16 UrhG). The same applies to texts (copying articles, books for a language model) or source code.

Until recently, AI developers operated in a highly unregulated area. It was a gray area: on the one hand, one could argue that training an AI is a technical analysis that does not make the actual work consumable – the AI does not end up spitting out exactly the copied data, but generates something new (ideally). On the other hand, the work is very much used to create added value (the AI capability), usually without a license fee.

New copyright rules for data mining (EU law)

At European level, legislators have responded to the growing importance of data mining. The 2019 Copyright Directive (Digital Single Market Directive) contains two important barrier regulations:

• Article 3 of the Directive allows text and data mining for scientific purposes for research institutions and universities, even if the data is protected by copyright, regardless of consent. This exception serves to promote research and only applies to non-commercial or scientific contexts. However, the works must be legally accessible (e.g. a researcher may mine texts from a licensed university database).
• Article 4 of the Directive allows text and data mining for any purpose (including commercial), but with the restriction that rights holders can object to this. This means that unless the rights holder has expressly stated that their work should be excluded from data mining, anyone may use the work for data mining. This opt-out can be achieved, for example, through machine-readable markings (“robot exclusion” on the website, metadata, etc.) or clear notices.

Germany has implemented these requirements: Section 44b UrhG (for freely permitted data mining, corresponding to Art. 4) and Section 60d UrhG (for scientific data mining, corresponding to Art. 3), among others, were added to the Copyright Act (UrhG). § Section 44b UrhG permits reproductions for the purpose of data mining as long as the rights holder has not prohibited this. Such a prohibition must be made in advance and in an appropriate manner – in practice, for example, by means of a notice on the website or in the terms of use of a service. In the absence of such a reservation, a startup may, for example, copy and analyze all texts and images found on the internet in order to train an AI model. It only has to ensure that it obtains the data lawfully (no hacking or circumvention of access blocks) and that no other laws – such as data protection – are violated.

This regulation puts a stop to the completely gray area and creates legal certainty: AI developers can claim to be legally authorized to mine data, provided they access publicly accessible data that has not been exempted from mining. A recent example: In Germany, the Hamburg Regional Court in 2023/2024 (case Kneschke ./. LAION e.V.) argued whether the non-commercial organization LAION was allowed to collect millions of images found online for an AI training dataset. As a result, the court confirmed that this data collection may be covered by the text and data mining privilege, especially if the authors have not opted out. This means that case law tends to treat AI training as legally privileged – at least in the first instance of this specific case, which is an important signal.

However, the Hamburg court also emphasized that certain questions remain unanswered: For example, it avoided deciding in principle whether the training of a generative AI model (which can later produce works independently) is really still pure data mining within the meaning of the barrier. Rights holders argue that the purpose here goes beyond the mere “extraction of information” – after all, the training serves not only to analyze, but also to build a system that can be a substitute for human creation, so to speak. This debate is not yet over.

Important: The limitation under Section 44b UrhG only permits the reproduction of data for the purpose of training. It does not automatically permit the publication of content taken directly from protected works. For example, if an AI reproduces entire passages from a book almost verbatim (because it has “learned” them during training), this could constitute an independent copyright infringement that is not covered by the training privilege. Start-ups must therefore keep an eye on output control in addition to pure training.

USA and other countries: fair use and open questions

In the US, AI companies rely on the flexible concept of fair use in copyright law. The courts there have ruled in the past that, for example, the mass scanning of books for a full-text search (Google Books project) can be a transformative use and therefore falls under fair use – although complete books were copied, the purpose (search, not readability of the whole book) was considered sufficiently novel. Similarly, it could be argued that training an AI on copyrighted works is fair use: the AI uses the works to create something new (a statistical model, a neural network) and does not necessarily compete as an identical replacement for the original works.

However, there are currently (as of 2024/2025) several lawsuits against AI developers in the USA: for example, groups of artists have joined forces and sued companies such as Stability AI (developers of image generators) or OpenAI because their AI models have allegedly illegally learned from protected images or texts. The US courts must now clarify whether fair use applies. The outcome is still uncertain. A ruling in favour of the AI companies could legalize this grey area in the USA; a ruling in favour of the authors could mean that licenses would be necessary.

In other countries, the situation is inconsistent. Some countries (e.g. Japan) introduced explicit exceptions years ago that allow the automatic analysis of works (to promote the tech industry). Others have more restrictive approaches or simply no precedents yet. For a startup that operates globally, this results in a patchwork of legal situations – what may be legal in the EU (thanks to the data mining barrier) could be considered copyright infringement in a country without such an exception. This uncertainty is part of the gray area.

Disruptive effects on existing business models

Regardless of the specific legal structure, AI applications have an enormous disruptive impact on traditional industries and business models. If, for example, an AI system can generate a text that resembles a journalistic article in seconds or create an image “in the style” of a particular artist, this will call into question the existing value chains. Content creators (authors, journalists, illustrators, photographers, musicians) will see their work used as a basis for training without being involved, and at the same time new competing products (AI-generated content) will emerge that may cannibalize their markets.

This disruption has several levels:

Legally, there is pressure to adapt the laws in order to find a fair balance. Example: If an AI image generator creates works in the style of well-known artists, the end product may be new, but it is still heavily influenced by the protected style. Copyright law does not currently recognize an artist’s style as a protectable element (only the specific form of expression is protected, not the general style). Some are calling for new intellectual property rights or remuneration models to be created so that artists are remunerated for the use of their work as inspiration/training. This is uncharted legal territory. One approach could be collective licensing models: AI companies pay into a fund that is distributed to the creators of the training data (similar to an exploitation company model). However, something like this has not yet been implemented – until then, start-ups in this area are operating in a field of tension of “act first, then regulate”.

In economic terms, AI start-ups are benefiting enormously from the current gray area: the availability of huge, freely usable amounts of data (e.g. images via web crawlers) has made it possible to quickly develop systems such as language models (chatbots) or image generators without having to pay billions in license fees. This has triggered an explosion of AI innovations and enabled many young companies to enter the market quickly. Existing companies – e.g. news publishers, stock photo agencies or music labels – sometimes see this as a threat to their core business. Some have started to take technical measures to protect their content (e.g. watermarks or code in images to make AI training more difficult, or lawsuit strategies to achieve deterrence). These reactions, in turn, can increase the business risks for AI startups. A startup that has built its AI purely on third-party data could be overwhelmed by a wave of legal disputes if, for example, a precedent is set against the use of such data.

Ethically and morally, the handling of training data is highly controversial. Advocates argue that knowledge and culture should be in the public domain, at least for the purposes of analyzing and developing new technologies – just as a person learns by reading and looking at art and later creates something of their own, AI systems should be allowed to “learn”. They see restrictive copyright law as an obstacle to digitalization and innovation. Opponents, especially many creative people, see it as theft or at least exploitation if their painstakingly created content is used for training without permission, only to be imitated by a machine, which reduces its market value. Morally, the question arises: is any means justified to achieve technical progress? Or do creators deserve some form of respect and participation, even if there is (currently) no absolute legal right?

A middle way that some start-ups choose is transparency and dialog: They disclose what data has been used and may offer cooperation to rights holders. For example, AI companies can voluntarily exclude certain data sets if the creators so wish, or offer options for creators to register their works to be either excluded or specially marked. Such approaches are not required by law, but can help to mitigate the potential for moral conflict.

It should also be noted that the EU regulation on artificial intelligence (AI Act) already contains further regulations that are primarily aimed at safety and transparency, but also indirectly affect the training of AI systems. Providers of certain AI systems are obliged to disclose the training data used (transparency obligation). This means that start-ups must now document exactly which sources were used to feed their AI systems. This transparency could be used by authors to assert claims if they believe that their data has been used unlawfully. Start-ups should therefore pay particular attention to these requirements: What previously remained hidden as a gray area – such as extensive, non-transparent data collections – could have to be disclosed in the future and be legally verifiable.

Opportunities and risks for AI start-ups in the gray area

The current gray area situation offers enormous opportunities for start-ups in the AI sector: with relatively free resources, they can develop models that would not have been possible just a few years ago. Those who offer a powerful AI service early on can secure market share and a technological edge. Many investors are prepared to invest in AI companies, even though the legal situation is uncertain, because they see the potential of the technology. The prospect of revolutionizing an industry sometimes makes the residual legal risk seem secondary – at least until a draconian ruling shakes the entire industry.

However, the risks should not be underestimated: Legal setbacks can not only mean financial losses, but can also fundamentally call the business model into question. If, for example, a court suddenly decides that a certain use of training data was subject to licensing, a start-up could subsequently be confronted with claims for damages that it can hardly afford. Or it would have to retrain its system – which can be technically and financially extremely costly – this time only with licensed or free data in order to continue legally. It would be like having to erase the AI’s “memory” and only rebuild it with permitted memories.

It is therefore advisable for AI start-ups in gray areas to practice risk management: they should seek legal advice at an early stage and check whether parts of the training can also be carried out with license-free or public domain resources in order to spread the risk. You should also document exactly which data was used and on what legal basis (e.g. “Data source X had no opt-out, therefore permitted under Section 44b UrhG”). This documentation can be valuable in the event of a dispute in order to demonstrate your own legal position and reduce liability risks.

AI founders can score moral points by treating the topic with respect – for example, by paying tribute to authors, communicating openly and perhaps even working on joint solutions. This can shape the public image: A startup that positions itself as fair and willing to talk will provide less of a target for accusations that it is acting recklessly or “plundering” intellectual property.

To summarize: AI applications in 2025 are in a changing legal gray area. Thanks to new laws, there is a tendency to allow data mining to a large extent, but not all questions (especially regarding commercial generative AI) have been conclusively clarified. Founders can use this gap to bring innovations to market quickly, but must live with the consequences: disruptive competition with established players, potential legal opposition and ethical controversies. Dealing with these issues with foresight – operating within the legal boundaries, remaining economically flexible and not shying away from moral discourse – helps start-ups to secure their position in the gray area in the best possible way.

Legal framework in Germany and internationally: FinTech, copyright and the geo-blocking dilemma

Legal gray areas often arise in an international context. Different countries have different laws and tolerance thresholds for innovative business models. What is legal or unregulated in one country may be prohibited in another. However, start-ups often think globally and digitally from the outset – the internet makes national borders permeable. This raises the question: Is an entrepreneur allowed to offer services from a country where they are legal, even though they are prohibited or heavily regulated in the target country (e.g. Germany)? And if so, is he morally obliged to block such offers in the prohibited target country(geo-blocking) in order to respect the local legal system?

We look at two areas as examples: FinTech (financial technology) and copyright offerings in a country comparison, as well as the associated moral issues and legal framework conditions.

Strict regulation vs. innovation-friendliness: FinTech in Germany and Estonia

The financial industry is one of the most heavily regulated sectors – and this is precisely why FinTech start-ups often look for loopholes or more favorable jurisdictions to offer new services. In Germany, financial services are subject to strict regulations from the Federal Financial Supervisory Authority(BaFin) and laws such as the German Banking Act (KWG), the Payment Services Supervision Act (ZAG) and others. Even those who forward third-party payments, manage account balances or broker investments can quickly require a license. Obtaining a banking license or FinTech license is expensive and time-consuming. In addition, the ongoing compliance obligations (money laundering prevention, capital requirements, reporting requirements) are high. For a small start-up, this can be an almost insurmountable barrier to entry.

Estonia, on the other hand, has earned a reputation as a FinTech paradise in Europe in recent years. The country, known for its digital administration and e-residency program, has created founder-friendly structures. Companies can be set up online in just a few days and the Estonian supervisory authority is considered to be tech-savvy and open to dialog. Many FinTech areas are harmonized across the EU, which means that if a company has a license in one EU country, it can also offer its services in other EU countries (known as passporting). Estonia has – historically – set relatively low hurdles, e.g. when issuing licenses for payment service providers or e-money institutions. As a result, a number of crypto exchanges and payment start-ups were licensed in Estonia because it was faster and cheaper there than in Germany, for example.

It can therefore be tempting for a German founder to implement their FinTech idea abroad, e.g. to set up a company in Estonia, obtain the necessary FinTech license there and then use this license to serve the German market. As long as EU law applies, this is actually legal across borders: a payment service provider licensed in Estonia may in principle serve customers in Germany without a German license – however, it must report its cross-border activities and BaFin can intervene in the event of irregularities in cooperation with Estonia.

The gray area arises when the services are politically or morally undesirable in Germany or contradict special national rules. For example, the regulation of cryptocurrencies was inconsistent for a long time: Germany classified certain tokens as “units of account” and required a permit for them (BaFin, for example, saw trading Bitcoin for third parties as a financial commission business requiring a permit), while crypto companies could operate more easily in Estonia. A startup that legally operates a crypto exchange in Estonia was therefore able to grant German users access. From a German perspective, these users were then operating in an area that would actually be subject to greater supervision here. Crowdfunding platforms were a similar case: Germany has investor protection regulations (VermAnlG) with prospectus requirements beyond certain thresholds. Some other countries initially had more liberal rules, allowing platforms to broker projects to German investors via France or the UK, for example, and thus circumvent the stricter German restrictions.

Legally, there are limits to purely domestic market-based offers if a country has legitimate reasons to restrict them. EU law allows exceptions to the freedom to provide services, for example for investor protection or public policy reasons. In practice, national authorities sometimes try to intervene indirectly: they warn consumers, threaten to block services or look for breaches by providers in order to prosecute them (e.g. breach of information obligations). For start-ups, this means that just because you have friendly regulation in a country doesn’t mean you can be completely carefree. You may be allowed to make formal offers, but you should still consider the expectations of your target markets.

In the meantime, Estonia has tightened its crypto licensing (also due to pressure and cases of abuse) – many licenses have been withdrawn and requirements have been tightened. This shows that gray areas do not have to be permanent: A loophole can be temporary until the regulator catches up or until international standards take effect.

From an economic perspective, the path to a liberal foreign country can offer start-ups enormous advantages: faster go-to-market, lower initial compliance costs, international focus right from the start. Some FinTech unicorns in Europe actually come from such “small” countries with great FinTech enthusiasm (e.g. Wise, formerly TransferWise, from Estonia/UK, or Revolut from Lithuania/UK). However, as soon as they grow, these companies often have to enter into dialog with the stricter countries – after all, you don’t want to permanently scare away customers in Germany or leave them in uncertainty. This is why successful FinTechs often later obtain German permission or set up local branches in order to build trust.

From a moral point of view, the actions of a FinTech start-up in such gray areas are ambivalent. On the one hand, it uses regulatory arbitrage: it deliberately seeks out the environment where the rules are the loosest in order to operate a business that may be strictly regulated elsewhere to protect consumers. Critics might say that the startup is bypassing important protection mechanisms, possibly exposing customers to risks and evading the responsibility that would be demanded in its home country. On the other hand, not all regulations are ideal – some may be overly cautious or hostile to innovation. In this respect, it can be argued that the startup is acting within the applicable laws (just the laws of another EU country) and is therefore not doing anything illegal. However, moral responsibility dictates that customers should not be harmed, despite the choice of location. A reputable FinTech, even if it is licensed in Estonia, will therefore voluntarily adhere to high security standards in order to gain trust.

Copyright gray areas: Germany vs. Asian countries

There are major international differences in the enforcement of copyright law. Germany (and Europe in general) has a well-developed copyright law with active prosecution. In contrast, some Asian countries – particularly China and South East Asia in the past – have a reputation for being more lax in dealing with copyright infringements. As a result, some online offerings that would be illegal in Europe operate from there.

A classic example is websites for streaming films or series that do not have licenses. While such offerings are quickly combated legally in Germany (shutdown by providers, criminal proceedings against operators, blocking orders), platforms that are hosted in countries with weak IP enforcement are popping up time and again. Founders and operators of such sites calculate that they are difficult to access from the respective country. As long as they are not prosecuted there or ignored for political reasons, they are in fact exploiting a legal gray area on a global level: the infringement may take place from Germany’s perspective, but the jurisdiction lies elsewhere.

One specific example for a long time was the Sci-Hub site, operated by an actor in Russia/Kazakhstan, which made academic research papers freely accessible and thus violated the publishers’ copyright. She was hardly prosecuted in her home countries, while Western publishers branded her as illegal. Another example: the file-sharing networks that flourished at the beginning of the 2000s (Napster etc.) later moved partly to Asia in the form of BitTorrent trackers or hosters. Services such as MegaUpload (Kim Dotcom’s platform) operated globally with servers in Hong Kong, among other places, and were more difficult to control from the USA until international cooperation closed the gap.

On the other hand, there were/are also legitimate services that vary due to different copyright regulations: For example, private copying rights are more broadly defined in some Asian countries; or the treatment of fan art and fan fiction (inspired by protected works) is more culturally tolerated than the strict Western copyright law provides for. A startup that operates a platform for remix culture or anime fan works, for example, could operate relatively unchallenged in Japan (where there is traditionally more tolerance for certain uses), whereas in Germany it would run the risk of being sued by the original rights holders.

The legal framework therefore varies: Germany has a rigid system of injunctive relief, warnings and, in cases of doubt, criminal liability for commercial piracy. Many Asian countries have similar laws (through international agreements such as TRIPS), but practical enforcement has historically lagged behind in some cases. However, these frameworks are constantly changing, and China in particular has significantly expanded IP protection, as it is now itself a major producer of IP (technology, films, etc.).

So is an entrepreneur allowed to take advantage of the fact that, for example, copyright infringements are de facto tolerated in country X in order to serve customers in countries where it is prohibited? In purely moral terms, this is similar to FinTech: the entrepreneur is acting legally there (because nobody is prosecuting it), but he is encouraging infringements in the target territory. The effect is that it undermines the legal system of the target country. In extreme cases, one could speak of digital flight from the law.

Countries are trying to counteract this legally: Germany, for example, has the instrument of network blocks (in the case of persistent copyright infringements, courts can order internet access providers to block certain foreign websites). In addition, international arrest warrants and extraditions are considered if there are tangible persons behind them, even if they are located abroad (Kim Dotcom, for example, was arrested in New Zealand because the USA accused him of copyright infringement). This means that the gray area may exist from the entrepreneur’s point of view, but there is a risk that the authorities will cooperate across borders as soon as enough damage has been done.

A less drastic but widespread scenario: differentiated licenses and geoblocking in the media sector. Streaming services such as Netflix, Spotify & Co. often acquire licenses territorially. For example, they may only show some content in the USA, but not in Germany (where another broadcaster holds the rights). To comply with this, they implement geo-blocking: users with a German IP cannot access the US library. This is basically the reverse application: The company itself does not want to infringe local rights and therefore blocks certain offers voluntarily or contractually depending on the customer’s location. Here you can see that technical location control is a means of respecting the different legal situations.

For a startup, geoblocking can be a sensible way of minimizing risk. For example, if you offer an online game of chance that is legally licensed in your home country but prohibited in other countries, it would be advisable to exclude these countries. Many international websites do this: they carry out a residency check during registration and reject customers from certain countries, or they block IP addresses from these regions. In this way, they try to avoid being subject to the foreign legal system in the first place (keyword: no “legal connection” in the country because the offer is not available there). Although there is a Geo-blocking Regulation (2018/302) in the EU that prohibits discrimination on the basis of nationality when making purchases, it is primarily aimed at the trade in goods and regular services, not in cases where the product would be prohibited in the customer’s country. If a service would be illegal in Germany, the provider can invoke this illegality to exclude German users without violating the Geo-blocking Regulation.

Morally, such geo-blocking is of course desirable from the perspective of the strict countries: it shows that the entrepreneur respects sovereignty. From the user’s perspective, however, geoblocking can be frustrating – many consumers circumvent it using a VPN, which in turn is a legal gray area in itself ( circumventing geoblocking is not expressly prohibited for users in Germany, but may violate the provider’s terms and conditions). This creates a gray area cascade: the company blocks in order to demonstrate legal compliance, users circumvent it in order to use the service anyway – de facto maintaining the gray market, only with additional effort.

Moral aspects: Legal in A, illegal in B – Responsibility of entrepreneurs

The moral responsibility of entrepreneurs in such constellations is a complex issue. It can be illustrated with a thought experiment: If a drug is freely available in country A, but banned in country B (perhaps due to safety concerns), can the manufacturer blithely supply it to customers in country B with the argument “it’s legal here”? Wouldn’t this be disregarding the laws of country B and possibly exposing people to dangers from which country B deliberately wanted to protect them?

Applied to digital business models: laws that prohibit offers usually have a purpose – protection of minors, consumer or investor protection, protection of cultural assets, protection of public order, etc. If an entrepreneur circumvents these laws because they are not directly subject to their jurisdiction, they still have to reflect ethically: Do I think the protective purpose is justified? Am I prepared to accept that this is counteracted?

Some entrepreneurs argue that the bans in the target country are outdated or paternalistic. For example, online poker was practically banned in Germany for a long time, while liberal licensing existed in the UK, for example. Poker platforms licensed in the UK or Gibraltar made it possible for Germans to play. The providers could say: “We offer an entertaining game of skill; we think it’s antiquated for Germany to ban it – the users want it.” Uber or Airbnb may have thought similarly in their early days: they saw the fact that local laws strictly regulated the passenger transportation or rental industry as an outdated system that they could circumvent using modern apps – to the benefit of consumers and small providers (drivers/renters), as they argued.

Other cases are less positive: A company that deliberately brings unregulated betting or casino offerings from abroad into a restrictive market also accepts that gambling addicts, for example, will have easier access. Or a provider of streaming piracy from overseas accepts that creative people in the target country will not see any money for their works. The moral weight is clearly different here – it’s not just about “outdated rules”, but about core issues of fairness and harm.

Entrepreneurs should therefore weigh things up on a case-by-case basis: Is my offer prohibited in the target country because it is considered harmful/dangerous per se? If so, it is morally questionable to simply offer it over the counter. Is it rather strictly regulated, but not out of a fundamental protective idea, but rather, for example, to protect a local market? Then the circumvention could be morally neutral or even justified in order to reduce market barriers. Of course, this assessment is subjective; ultimately it boils down to whether the entrepreneur can and wants to live with the consequences – both legally and ethically.

Another moral aspect concerns the customers: If I as a provider know that my customers may be behaving unlawfully themselves by using my service (for example, a German customer who places an online bet that is illegal under German law is also committing an administrative offense or a criminal offense, depending on the case), do I have a responsibility to prevent them from doing so? Legally, it may be “their problem”; morally, you could argue that you shouldn’t get your customers into trouble. This speaks in favor of blocking offers in countries where their use would be illegal, or at least communicating clearly: “Attention, the use of this service may not be permitted in your country.” Some websites do indeed have such notices.

Finally, the company’s own reputation also plays a role: a startup that openly boasts about circumventing regulation will provoke different reactions depending on the audience. Progressive tech supporters may see it as courageous and innovative, while conservative stakeholders (e.g. authorities, established companies or some members of the public) may see it as unethical or unfair. If you want to be successful in the long term, you often have to make compromises and behave in a more compliant manner, at the latest when you experience major growth.

Geoblocking, as unpopular as it is from the user’s point of view, can therefore be a responsible step from a business perspective: it signals that you respect the legal systems and do not want to aggressively exploit every loophole. Although you potentially lose customers, you reduce the risk of harsh countermeasures and show goodwill. In some cases, geoblocking is also part of license agreements or conditions when working with certain partners.

Conclusion in this area: The legal framework conditions can be diametrically different depending on the country, which clever start-ups can use to their advantage (exploiting legal loopholes in one country to operate globally). However, they must be aware of the limits of this approach: International law, cooperation between states and even involuntary involvement in foreign jurisdictions (for example, if servers are rented in Germany or staff are employed in the target country) can quickly put the assumed security into perspective. Morally and strategically, it is often advisable not to play with fire excessively: Making some concessions to the strictest relevant jurisdiction can be wiser in the long term than drawing maximum profit from the unregulated state.

Entrepreneurs are caught between competitive advantage through regulatory arbitrage and responsibility as a global player. Successful business strategies weigh this up and look for a way to offer innovation without unnecessarily provoking confrontations with legal systems.

Gray areas as a driver of innovation: Are startups allowed to deliberately exploit legal loopholes?

Do legal gray areas perhaps even have a positive function for innovation? Many start-ups owe their success to the fact that they have questioned or circumvented established rules – be it Uber in the passenger transportation market, Airbnb in the accommodation sector or countless online services in areas that used to be strictly licensed. This raises the fundamental question: should start-ups be allowed to drive innovation by deliberately exploiting legal loopholes or unclear laws? Or should they operate strictly within the framework of the existing regime until the legislator expressly permits something new? Practice shows that gray areas are often the battlefield where innovation and regulation meet.

Innovation by breaking the rules? – Pros and cons perspectives

Pro arguments (from the perspective of startups and innovation promoters):

• Legislation behind the technology: Technological progress often runs ahead of the law. If everyone waited for the legislator to catch up, innovation would come to a standstill. Many innovative concepts do not initially fit into any existing scheme – they are neither expressly permitted nor prohibited. In this limbo phase, you can only try them out by using the gray area. Example: When Uber started with ride-hailing apps, there were no laws governing app-based private rides; there were old cab regulations. If Uber had waited for new laws, the concept would never have been tested. By operating in the grey area, however, it became clear that there was demand and that regulation needed to be modernized.
• Economic benefit and consumer interest: Gray area models often emerge because traditional rules primarily protect established providers and leave consumers with less choice. Start-ups that exploit these loopholes offer consumers new, often cheaper or more convenient services. This can exert positive pressure: either the established providers adapt (better services, lower prices) or regulation is adapted to integrate the innovation. Either way, the end users often benefit in the end. A line leads from Napster (music exchange) to Spotify; from Uber & Lyft to improved public transport services or new mobility laws – the gray area acts as a catalyst.
• “No law, no ban”: In a state governed by the rule of law, anything that is not expressly prohibited is permitted. Entrepreneurs are allowed to explore the boundaries as long as they are not clearly acting illegally. This freedom is even intended to enable freedom and development. You could argue that a startup is allowed to take advantage of all the legal benefits it can find – including loopholes in the law. This is comparable to tax law: companies use legal loopholes to save on taxes until the legislator closes them. This is not uncommon in business and is often not morally condemned as long as it remains within the law.
• “Better ask forgiveness than permission”: A common saying in Silicon Valley is that it is better to ask for forgiveness afterwards than permission in advance – because permission is often not granted. Startups have limited resources and time. “Getting permission” in the form of regulatory approvals can take years and destroy the first mover advantage. Therefore, from a strategic point of view, it is tempting and sometimes necessary to create facts and then find solutions with the regulators once the model has already proven itself.

Contra-arguments (from the perspective of the legal system and ethics):

• Circumvention of the legal concept: Even if something is not explicitly prohibited, the deliberate exploitation of gray areas can undermine the protective content of the law. Laws have purposes – e.g. the cab license requirement should protect passengers and ensure supply. If a startup now ignores all obligations (no licensed drivers, no insurance, no collective bargaining agreement), it may have a competitive advantage in the short term, but may undermine important standards. This can lead to damage (e.g. uninsured accidents, exploitation of drivers, etc.). Critics say that this is not fair competition, but a one-sided breach of the rules at the expense of others.
• Uneven playing field: A startup in the gray area often competes with traditional companies that (have to) abide by all the rules. This gives the newcomer an advantage, which can be innovative on the one hand, but distorts fair competition on the other. The company that does not play by the rules is rewarded, so to speak. Law-abiding companies fall behind. This can create false incentives and can also be economically problematic if everyone tends to work around the rules in the long term.
• Legal uncertainty and loss of trust: If too many people operate in the gray area, trust in the legal system suffers. Consumers could be unsettled: “Am I allowed to use this? Is that legal?” – Examples: when streaming from obviously unlicensed sources, users did not know for a long time whether they were making themselves liable to prosecution. This feeling of the Wild West in a market is bad for the general public. Investors also hesitate in the face of extreme legal uncertainty; they want clarity at some point. An environment in which the spirit of the law is constantly violated could provoke excess regulation in the long term (the legislator reacts with even stricter laws to close loopholes), which then also places a greater burden on the innocent.
• Risk for the startup itself: Not to forget: A gray area means risk. If it turns out that the model was unlawful after all, there is a risk of penalties, additional payments and reversals. In the financial sector, there have been cases of start-ups that, for example, collected funds without regulation (ICO – Initial Coin Offerings in the crypto scene), raising millions, only to find out later that the regulator classified it as an illegal business – consequence: freezing of funds, proceedings, penalties, investor losses. Such risks can destroy a young company. The prospect of profit is therefore set against potential total loss, which is not always rational. In addition, founders can be personally liable or even prosecuted if the grey area turns into illegality (for example, if they were fraudulently misled about risks or if there was a license requirement that was ignored).

Legal and ethical limits for the exploitation of gray areas

How can startups use gray areas without crossing red lines? From a legal point of view, the boundary is of course the written law: if something is expressly prohibited (e.g. dealing in certain drugs, certain prohibited business models such as pyramid schemes), then it is no longer a gray area, but illegal – it must be taboo. Inciting others to violate the law is also clearly prohibited. A startup should therefore not actively induce its users to act illegally (for example, by providing instructions on how to circumvent geoblocking via VPN if this would be illegal in the user’s country). This would cross the line into joint responsibility.

Another legal boundary is reached when court or authority decisions narrow the gray area. Models often start in limbo, but soon there are the first administrative acts (e.g. prohibition orders from the authorities) or judgments. As soon as a supreme court ruling makes it clear that certain behavior is unlawful, no serious startup can claim that it is still in the dark. Then it’s time to adapt the model or stop. To continue would mean deliberately breaking the law.

Ethically, startups should question their motivation: am I only using the gray area to grow faster and overcome long-standing laws, with a better result for everyone in the end? Or am I using it primarily to make a profit by circumventing rules that may serve a good purpose? A responsible entrepreneur should not shamelessly exploit gray areas, but rather view them as a transitional phase. The aim could be to achieve a regulated status in the long term – for example by participating in new industry standards or laws.

A practical limit is also the company’s own corporate ethics and public image. Some companies declare internally: We want to be compliant and not aggressively violate laws because we want to build trust in the long term. This attitude leads to gray areas being entered with maximum caution or deliberately avoided. Others, often from the tech environment, have a “rebel” mentality and see it as a matter of honor to challenge the rules – this culture may work in a small circle, but as soon as a company gets bigger, corporate governance and compliance become increasingly important (also due to pressure from investors). At the latest when going public or in negotiations with strategic partners, gray areas are critically examined.

Economic opportunities and risks – investor perspective and growth

From an economic perspective, gray zone strategies offer high upside opportunities, but also high downside risks. This is reflected in the investor’s perspective:

• Opportunities: A start-up that avoids regulation can often tap into a market that others have been denied. Growth curves can be steep, which attracts venture capital. Some investors specialize in such “frontier” areas (e.g. venture capital in cannabis before legalization, or in crypto before clarification of the legal situation). They know that if things go well, a quasi-monopoly or a massive market presence beckons, which is very valuable later – with a subsequent license. In short: high risk, high reward.
• Risks: Many conservative investors (e.g. institutional investors, larger funds) avoid companies with unclear legality. The startup could have difficulties securing follow-up financing as soon as the legal risks become apparent. Early investors could hold back or demand high risk discounts (which depresses the valuation). In addition, more money flows into legal advice and lobbying – expenses that a strictly legal startup may have less. Legal disputes can also cause costs that were not included in any business plan.

For corporate strategy, it is therefore advisable to plan with scenarios: What if the gray area disappears and we have to obtain a regular license? Can we then afford it? Is there a plan B for our business model? Many of today’s giants have gone through this transformation: Uber ultimately acquired licenses for car rental companies and accepted requirements to stay; FinTechs have acquired banking licenses or partnered with licensed partners; Airbnb works with cities for landlord registration systems, etc. A startup should therefore have ways to become legal before it loses the gray area.

In order not to lose support in the gray area, communication must also be right. Investors, partners and the public should be told what risks exist and how they are being countered. If a founder plays down the situation (“Nothing will happen, the authorities just don’t understand us”), trust can be lost. Conversely, a proactive approach (“We are aware of the legal uncertainty and are working on a solution, here are our measures…”) creates credibility.

Best practices: Balancing innovation and compliance

Startups can consider some best practices when venturing into legal gray areas:

• Seek legal advice: Legal advice should be sought early on to clarify exactly where the boundaries lie. What is currently permitted and what is clearly prohibited? Are there any licenses that could be obtained after all (sometimes there are special permits or classifications)? A well-founded legal opinion can be worth its weight in gold – also to show investors. More on this later in the lawyer section.
• Make risks transparent: Communicate clearly internally and externally what legal uncertainties exist. Investors and key partners should not experience any nasty surprises. This transparency is part of the drafting of contracts with investors: if necessary, clauses are included on how to proceed should regulation strike (e.g. money back, pivot, etc.). Trust is created when stakeholders feel that the founding team is assessing the situation realistically and is not acting negligently.
• Self-regulation and compliance light: In many gray areas, a startup can voluntarily introduce certain standards to show that it is acting responsibly. For example, a FinTech without a formal license could nevertheless implement money laundering checks in accordance with banking standards to demonstrate that it adheres to good practices. Or a platform without legal filtering obligations could still proactively filter content that is harmful to minors in order to ensure the protection of minors. These measures not only reduce the risk of scandals, but can also impress regulators – perhaps they are more likely to let a startup get away with it if it already “behaves” like a regulated one.
• Dialogue with regulators and associations: Especially in promising fields, it is worth seeking contact at an early stage. Some authorities offer innovation consultation hours or so-called regulatory sandboxes in which new models can be tested. By becoming part of the debate, you can influence the design of future rules and signal good will. This reduces the risk of a crackdown, as the regulator can see that someone wants to cooperate: Someone here wants to cooperate, not rebel.
• Exit strategy from the gray area: Plan for the gray area to be temporary. Have resources ready to submit license applications if necessary, reach legal settlements or adapt the model so that it is compliant. It may also be possible to partner with established players (a formerly illegal streaming service could, for example, enter into deals with the studios, as happened with some platforms that were then continued under license). This flexibility can ensure survival if the existing gap closes.

In short: start-ups are allowed to use legal loopholes – it is often the path to innovation. But they must know the limits: clear prohibitions are taboo, warning shots from the judiciary must be taken seriously. Exploitation should never be an end in itself or purely opportunistic, but should ideally build a bridge to an improved legal situation. It can pay off economically, but only if the risks are managed prudently. If start-ups see gray areas as a temporary opportunity and not as permanent anarchy, they can actually make progress with this approach. Otherwise, they run the risk of falling over legal and ethical cliffs.

Legal advice in the gray area: duty and responsibility of the startup lawyer

Innovative start-ups that operate in legal gray areas – deliberately or out of ignorance – need competent legal advice. A German lawyer who advises such start-ups (as described in the profile on itmedialaw.com: a lawyer with a focus on IT law, media law, contract law and international business development) has a special role to play. He is a service provider for the client and should protect the client’s interests, but at the same time he is also an “organ of the administration of justice” – i.e. committed to the legal system and justice. This results in an area of tension: Is a lawyer allowed to actively support their clients in the use of legal gray areas? Or must he exercise restraint due to his professional responsibility and, in case of doubt, slow down rather than speed up?

The role of the lawyer: Representative of interests and organ of the administration of justice

According to Section 1 of the Federal Lawyers’ Act (BRAO), the lawyer is an independent organ of the administration of justice. This means that they must always keep the legal system in mind when representing their clients’ interests. This includes, for example, that lawyers may not make deliberately untrue statements in court or promote unlawful strategies. Independence, confidentiality and conscientiousness are further core obligations (Section 43a BRAO).

However, these duties do not mean that the lawyer becomes a vicarious agent of the authorities or has to keep his hands off every controversial issue. On the contrary: advising clients in borderline legal areas is one of the tasks of a lawyer. However, they must carefully weigh up how far their support can go. Basically, as long as a client is not clearly planning something illegal but is operating in a gray area, it is legitimate and even important for them to seek legal advice – and the lawyer is of course allowed to give this advice.

The lawyer therefore represents the company’s interests: He should help the startup to make the business model as successful as possible and avoid legal stumbling blocks. At the same time, they must remain true to their legal conscientiousness: He must not actively instigate or contribute to the commission of legal violations. Ideally, the lawyer becomes a reliable navigation aid, guiding the client safely through the gray area without running aground.

Support in the gray area: What a startup lawyer can do specifically

An experienced lawyer in IT and media law knows the typical gray areas (like some of the ones we discussed above) and is aware of the latest rulings and legislative initiatives. His approach to advising a startup in such a situation will be practical and solution-oriented:

• Analyze the legal situation: First, the lawyer provides the founding team with a clear overview: Which laws are affected? Where are there prohibitions, where are there gaps? Are there already court rulings on similar models (e.g. BGH rulings on the liability of platforms for interference, ECJ rulings on online services, etc.)? This analysis forms the basis for all further steps. It should be honest and comprehensive – even uncomfortable truths must be put on the table. A competent lawyer may cite standards and case law to support their assessment (e.g. reference to Section 10 TMG Safe Harbor, or a Higher Regional Court ruling that points in a certain direction). This way, the startup understands where it stands.
• Designing the business model and contracts: In the next step, the lawyer can help to make the business model as legally compliant as possible without destroying the innovative core. This is often a creative act: risks can be shifted or mitigated through certain contractual clauses or terms of use (e.g. indemnification of liability by users, obtaining consent, incorporating age verification, agreeing territorial restrictions). In the area of contract law, the lawyer is required to find the right wording to protect the company. An example: A platform startup in the gray area should definitely prohibit users from committing legal violations in its general terms and conditions and reserve the right to delete content in the event of notices. Although this alone does not release the company from liability, it shows both legally and morally that the company does not identify with the infringements.
• Compliance measures and policies: The lawyer advises on which internal processes the startup should establish in order to comply with legal obligations. This can be the establishment of a legal department light, or at least a responsible person who coordinates all complaints or inquiries from authorities. It can also be checklists on when to seek legal advice (e.g. before launching a new service that could be sensitive from a regulatory perspective). The lawyer can recommend standard processes (e.g. provision of an imprint and a data protection officer, implementation of a notice-and-takedown workflow, etc.), especially for topics such as data protection, protection of minors or copyright. These measures will later show that the startup is taking its due diligence obligations seriously in the event of legal proceedings – which often mitigates penalties or reduces liability.
• Communication with authorities: If initial contact is made with regulatory or supervisory authorities (e.g. a request for information from BaFin, a cease-and-desist letter from a media authority, a warning letter from a competitor), the lawyer can act as a buffer and mediator. They formulate answers, represent the startup externally and try to avoid escalation. Misunderstandings can often be clarified or compromises found at an early stage if a professional speaks the language of the authorities. This is worth its weight in gold for the founder, as they are usually not experts in administrative law themselves and should avoid making rash statements.
• Risk assessment and plan B: A good legal advisor will also tell the startup honestly what the worst case scenario is and how to prepare for it. For example: “If the court decides X differently than you had hoped, you would have to discontinue feature Y. Let’s start thinking about alternatives.” This forward-looking advice can become part of strategic corporate planning. This also includes the lawyer advising in case of doubt: “Don’t take this risk” – i.e. slowing down the client if they are clearly heading down the slippery slope. This reprimand in the client’s best interests is also part of the job, even if the client may not like to hear it.

In short, the lawyer can and should support the startup in using the gray area – but in a controlled manner. They provide a safe framework within which the startup can operate, and if it threatens to go beyond this framework, the lawyer pulls the ripcord.

Limits to legal support: where restraint is required

Despite all the willingness to help, there are times when a lawyer has to say no. For example, if the client clearly intends to break the law and asks the lawyer to cooperate. Example: A startup wants to use illegally acquired data and asks the lawyer how this can be hidden or covered up. This would cross the line – the lawyer may not provide advice on the commission of criminal offenses (this would bring him into conflict with the law, keyword aiding and abetting). Nor, of course, may he falsify documents, destroy evidence or the like if asked to do so.

In more subtle cases: If a client defiantly throws all warnings to the wind (“We don’t care what the court has said, we’ll carry on as before”), the lawyer finds himself in a dilemma of conscience. He has given advice and advised adjustment, but the client deliberately wants to continue illegally. In this case, the lawyer’s ethics dictate that he should resign the mandate if necessary. Otherwise, the lawyer would in fact be contributing to a further violation of the law, whether through tacit approval or further advice on how to hide it after all.

After all, being an organ of the administration of justice also means helping to enforce the law, not encouraging lawbreaking. In practice, of course, resigning is the last resort – it is usually possible to change the client’s mind if you make the consequences clear. A sensible start-up founder will listen to their lawyer when they say: “This is where it gets criminal, you shouldn’t do that.”

Another boundary is the moral dimension: although a lawyer is primarily obliged to the legal system and his client, he also has personal moral values. There is a right among lawyers to refuse a mandate if it would be incompatible with their conscience (there is no duty to represent everyone, except in cases of necessary defense in criminal law, etc.). An example: A lawyer who is personally an author (for example, a musician on the side) could refuse to provide legal advice to an obvious piracy platform because it contradicts his understanding of values – even though it would be legally possible to act within the law. That is an individual decision. However, a lawyer who specializes in startup and IT law will usually take a pragmatic, neutral stance: He sees his job as solving the legal issues, not judging the business idea morally. Nevertheless, if the client’s business activities are blatantly unethical (e.g. exploitation of users, fraud against customers, extreme infringements of the law), the lawyer is not obliged to support this. Moral responsibility can therefore lead to persuading clients to change their minds or to drop them if they do not want to listen.

Practical support: from early start to establishment

Ideally, a lawyer with experience in the start-up sector should be brought on board at an early stage – often as early as the foundation or initial financing. This allows them to set the right course right from the start. Advice is then not a one-off expert opinion, but an ongoing process parallel to business development. Especially in dynamic sectors (IT, media, AI, e-commerce), both the company and the legal situation are constantly changing. The lawyer monitors legislative projects, new court rulings or official opinions (e.g. new BaFin bulletins, decisions by the EU Commission, etc.) and proactively informs the startup if there is a need for action. This ongoing support is valuable for start-ups, as they cannot follow every legal news magazine themselves. In this way, the lawyer ensures that no “nasty surprise” goes unnoticed.

A lawyer can also play a role in communication with investors. In due diligence reviews, investors specifically ask about legal risks. A prepared lawyer will help the startup to draw up a legal memo or a risk section in the business plan that explains how to deal with the gray areas in a transparent but reassuring way. This demonstrates professionalism and can build trust. If necessary, the lawyer will also take part directly in discussions to explain complex legal issues to the investors. In this way, legal uncertainty does not become a deal-breaker, but a managed risk.

Networking and sharing experiences are further plus points: Lawyers who look after many start-ups have an overview of which approaches have worked in practice and which have not. They may be familiar with precedents (including unpublished settlements or decisions) and have contacts with colleagues, associations or even authorities that they can consult informally. This experience benefits the client – it saves them from having to find every pitfall themselves.

Finally, the lawyer also serves as an ethical advisor, insofar as he can help to formulate the corporate philosophy in a legally compliant manner. For example, they can work with the founding team to develop a code of conduct or guidelines on how to act with integrity despite the gray area. This turns legal imperatives into values that are practiced within the company. An example: a start-up decides, on the advice of a lawyer, to process all complaints from rights holders within 24 hours and to maintain an open dialog – this becomes part of the corporate culture. This pays off in terms of reputation in the long term.

Competence and positioning of the advising lawyer

In conclusion, it can be said that a lawyer who advises start-ups in the gray area plays a key role in the sustainable success of these companies. They must maintain a balance between facilitator and admonisher:

• As an enabler, he knows creative legal structures, finds loopholes and argues in favor of maximum entrepreneurial freedom when in doubt. He does not shy away from taking unusual positions as long as they are legally justifiable. This “out-of-the-box” advice can give the startup a decisive advantage – for example through an innovative contract model or a clever company structure (e.g. founding abroad with a German branch) that makes optimum use of the legal situation.
• As an admonisher, he prevents the startup from flying blind. He reminds them of compliance, of medium and long-term consequences and, if necessary, hits the brakes before the gray area turns into a breach of the law. However, he does not act as a preventer, but as someone who points out possible solutions: “We can’t do it this way, but maybe we can try it that way…”.

For the reader – especially a startup founder – this should make it clear: With the right legal support, it is possible to navigate uncertain terrain with relative confidence. The lawyer not only has knowledge of the law, but also industry experience in IT law, media law and contract law, understands the technical and business background and can therefore provide tailor-made advice. He recognizes international contexts (as we have seen with FinTech and copyright law) and takes these into account when advising on international business development.

An advising lawyer who acts competently in this context will always endeavor to open up room for maneuver for the client and at the same time ensure legal certainty as far as possible. This dual role requires a great deal of experience, up-to-date knowledge of case law and often also negotiating skills. If he does it right, the client will not even notice how many legal pitfalls are being avoided – he can concentrate on the core business while the lawyer stakes out the route in the background.

Positioning: Ultimately, supporting start-ups in legal gray areas is a specialized discipline that combines a high level of technical expertise with an understanding of the start-up mentality. A lawyer who has made a name for himself in IT law, media law and contract drafting and at the same time understands the dynamics of innovative business models offers invaluable added value here. He does not prematurely condemn new ideas out of legal caution, but develops viable solutions together with the client within the bounds of what is legally possible. In doing so, he keeps an eye on ethical principles and maintains his integrity as an organ of the administration of justice.

Conclusion for start-ups: The use of legal gray areas is not a game without rules. However, with an experienced lawyer at your side, you can make optimum use of the existing leeway without crossing the red line to breaking the law. This makes innovation possible without completely sacrificing legal certainty. The competence of such an advisory lawyer is demonstrated by the fact that he masters the complex interlocking of law, business and morals and paves the way for his client – from the foundation to successful international business development, even on difficult legal terrain. This gives every founder the confidence they need to successfully drive their vision forward despite the gray areas and underscores the importance of first-class legal support in the startup ecosystem.