I recently spoke with a lawyer who was newer to representing cannabis clients. The lawyer asked me to describe the biggest legal mistakes I see for cannabis businesses. Over the years, our cannabis lawyers have seen cannabis businesses make just about every mistake in the book. Today though, I want to talk about what I think are some of the most common legal mistakes for cannabis businesses from a corporate governance and operational standpoint.
Legal mistake #1 – hiring a cannabis lawyer and ignoring their advice!
A lot of folks in the cannabis industry don’t quite understand the role of a cannabis lawyer. I wrote about the nature of that role in dealmaking here for what it’s worth. But these types of folks seem to think a lawyer’s job is to rubber stamp whatever they want to do. Maybe the goal is to have someone to blame if things go wrong, but who knows. Businesses looking for a legal rubber stamp will eventually get upset when it’s not forthcoming. And in many cases, those businesses may ignore what their lawyers said and move forward anyways. Not good!
If a lawyer says “don’t do X” or “if you do X then here’s a laundry list of bad things that will happen,” they are doing it for a good reason. If the business goes ahead and does the thing and faces consequences, then they not only will have nobody to blame, but their contrary opinion of counsel could make their lives even harder down the road. This is a big legal mistake for cannabis businesses.
Legal mistake #2 – handshake cannabis deals
We’ve said it before and don’t really need to explain it again – handshake deals are a big, huge legal mistake for cannabis businesses. They just should not be happening in 2022. Here are some of our old posts:
Why Handshake Cannabis Deals Are BAD
Investment and Securities Litigation – Handshake Deals Are Not. Your. Friend.
Running a Cannabis Business? Write it Down
How to Avoid Cannabis Litigation: 5 Tips
Marijuana Companies: Better to Be Formal
Legal mistake #3 – 50/50 ownership of a cannabis business
Another very common legal mistake that cannabis businesses — especially startups — make is 50/50 ownership. I wrote a post about this called “50/50 Cannabis Business Ownership: A Terrible Idea.” That post sums the issue up completely. The gist is that in a business that has 50/50 ownership, any disunity in decision-making can grind the business to a halt.
There are easy ways to fix this like deadlock provisions or giving one partner more of a vote on certain decisions. But a lot of businesses don’t do this. I’ve had people get mad at me for suggesting that they needed a deadlock provision – “hey, we’re best friends, we’d never fight, we don’t like that you’re even suggesting this!” That kind of stuff. It doesn’t matter how friendly partners are: if the business is deep in the financial hole or is having problems, they will inevitably stop seeing eye to eye. If two people want a business to fail, this is the way to do it.
Legal mistake #4 – bad business “marriages”
Sort of along the same lines as 50/50 ownerships are what I call bad business marriages. These are situations when people with wildly different backgrounds and expectations get involved in the same business or project. This happens all the time in the cannabis world. The most common one of these is when someone from an old-school industry with lots of money gets paired with someone with decades of experience in the cannabis industry but no business experience in an established industry where written contracts, record-keeping, paying taxes, etc. are the norm.
A lot of the old-school business types are initially smitten by the experienced cannabis operators – “hey, this person knows what they’re doing, we’re going to quadruple our investment!” When that doesn’t happen, things will go south. And if the old-school investor pops their head under the hood of the business, that’s when things can actually blow up.
There are some things that people in these positions can do to protect themselves if they have good lawyers, but they often don’t concern themselves until it’s too late – another huge legal mistake for cannabis businesses.
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