Should You Join the Board of Directors of a Cannabis Company?

By Vince Sliwoski, Attorney at Harris Bricken

We lawyers get asked to sit on boards pretty frequently. At this law firm, those requests are sometimes made by clients and I believe we have always declined, but not for the reasons you may be thinking.

In many cases, a lawyer who sits on the board of a company he or she represents risks exposure to conflicts of interest. That is especially true where equity compensation is involved. In other cases, founders of a new company will not fully appreciate the role of a board and what it really means for oversight and governance. Or, expectations simply be mismatched. Overall, I’ve found there are more reasons to say “no” than “yes” to requests to join boards. And I say that as someone who has chaired a couple of them.

This post covers some high-level considerations for someone considering joining a cannabis company board. It’s written with lawyers in mind, but most of these thoughts apply to just about anyone.

Insurance

I may be starting out of order, but only slightly. One of the first questions I typically ask when invited to join a board is what insurance is in place. What I’m looking for is a broadly written directors and officers (D&O) policy with decent policy limits. (Yes, you can get one of these as a cannabis company.) Ultimately, I would not sit on a board without insurance.

D&O insurance covers individuals from personal losses if they are sued in relation to their role as a director or officer of an organization. Generally speaking, U.S. corporate law exists at the state level; and generally speaking, it grants directors and officers broad discretion in their business activities. Still, that doesn’t mean a director cannot be sued in the first place. And cannabis companies tend to be pretty good at giving people reasons to sue— even the big ones.

Bylaws, Articles of Incorporation, etc.

Big question: how much control does the board actually have under the bylaws? I’ve seen bylaws drafted to afford directors insufficient say in company governance— sometimes carelessly and sometimes by design. A director candidate should ensure that the board is not a token body with no real ability to govern; that the board is not forced to bless whatever nonsense because officers or shareholders hold all the keys. It can be tempting for a founder to charter a weak or “blank check” board. As a director, you are just wasting your time while giving someone cover in that situation. More than that, you may also feel that your time is very valuable, and you want to add value wherever you go.

Compensation

Corporate documentation also comes into play on the pay side. Many companies will incentivize people to join their boards with stock (often restricted stock). Bigger companies may also offer cash, or maybe cash plus stock. Whatever it is, you will want to make sure that everything is properly structured and papered— in addition to assessing whether the stock has real value (if applicable), and what the tax implications may be. In my view, if the company is for-profit, some form of compensation is appropriate. If the company is a nonprofit, it’s a different story.

What are the board dynamics?

Assuming you like the cannabis company and its goals enough to join, you will want to understand the dynamics within the board itself. Most boards are set up with a “chair” or other director who gets to run meetings and monopolize governance to some extent. That can be good or bad, depending on who sits in that seat. (This is often a rotating position.) But if the board is dysfunctional, or if the board regularly clashes with the executive team, or if the board is permanently out to lunch, of if the board keeps poor records, or if the board has record of dismal performance, or if the board is irrevocably stacked with founders and founder appointees… don’t join the board!

How much time are we talking?

Some boards are basically full-time jobs. Others may be just a few hours a week. Still other times, a board member will have almost no duties, and be recruited just for their name. When I served on the board of a prominent arts organization, for example, a famous Hollywood director agreed to join our board. Because he had won many awards and accolades and because we wanted to trade on his name, we agreed to relax participation requirements. The point here is there may be room for negotiation and flexibility. In fact, you may even come across boards where certain members are treated exceptionally (bylaws permitting).

Sometimes, joining a standing or ad hoc committee is also a good place to start. Larger boards will have these structures; these can be a good entrée to full board service, or just a one-off tour.

Why do they want you? (Truly)

Many companies will recruit lawyers as board members for free or cost-effective legal advice. This can put the lawyer in an awkward spot. Lawyer-directors must ensure that any legal advice they provide remains privileged. If the lawyer-director is being asked for legal advice, she should also clarify that the meeting at issue has been called solely for that purpose (and that no business advice will be given). The lawyer must also vigilantly watch for pitfalls where her law firm’s interests could be favored over the corporate client. Sometimes, that dynamic becomes very hard to control.

For other professionals, the analysis may be similar if a company pursues them for trade services. An accountant may be identified as a de facto CFO from her director’s chair, for example; or an H.R. professional may be sought to help manage staff. If your goal is to give general business advice rather than perform a specific “job” for the company, it’s important to communicate that up front.

Finally, as a board member you should understand and appreciate that if a company is not using your professional expertise directly, it will still want to leverage your rolodex. This means that, in addition to the cannabis company being interested in you, you should believe in the cannabis company. In my view, this means not merely supporting the company enough to make a few introductions: you should feel comfortable and even convicted in that role. At that point, it’s fun being on the board.

Re-published with the permission of Harris Bricken and The Canna Law Blog

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