CS Disco shares tumbled 20% Tuesday as investors reacted to news that legal AI startup Legora is in talks to raise $400 million at a valuation exceeding $5 billion. The steep decline marks the latest example of the "AI scare trade," where established companies face selling pressure following announcements of well-funded AI startups entering their market.

According to Forbes, Legora's potential funding round would mark its third capital raise in approximately six months, bringing total funding to $600 million during that period. The startup previously raised $150 million in October at a $1.8 billion valuation and $80 million in September at a $675 million valuation. The report also noted that Legora's rival Harvey is reportedly in talks to raise $200 million at an $11 billion valuation, just two months after a funding round that valued it at $8 billion.

The selloff in CS Disco comes despite the company's recent announcement on February 9 of what it called "the industry's first scaled agentic AI tool for fact investigation and eDiscovery." The contrast between private market enthusiasm for legal AI startups and public market reactions highlights growing investor concerns about established legal tech companies facing new AI-powered competition.