For many entrepreneurs, the natural impulse is to start a business with their friends or family members. The familiarity of the relationship and the assumed trust is an attractive lure, however, many people skip over vital steps to protect themselves with proper founding agreements. The following considerations will help insulate your business and relationships:
Founding Agreement Essentials:
- Dissolution plan
- Entity agreements
- Non-Disclosure Agreements
- Operating agreement
- Equity Distributions
- Intellectual Property and Trademark Agreements
The cannabis industry is increasingly fast-paced, extremely competitive, has several gray-area rules and a lot on the line. As a result, business situations can get tense and lead to dissolution. Most entrepreneurs don’t like to think of dissolutions in advance. It’s sort of like a business pre-nuptial agreement. It can put a damper on the “romance” and optimism that typically characterizes entrepreneurship. If the worst happens, however, it helps to protect your assets, your labor, and your interest in advance.
There are several options to choose from when it comes to business structures. In the cannabis sector, some states mandate particular structures such as a nonprofit. Others allow for-profit entities. Research local laws as it relates to allowable business structures in advance.
Non-Disclosure agreements are beneficial for ensuring that your trade secrets are not spread on the open market. These agreements, however, have to specify what in particular is not allowed to be disclosed in order to be effective.
Operating agreements and standard operating procedures often lay out to all partners involved how you will conduct your business. It can cover everything from safety plans, payment of dividends, roles, expectations and more. It often has equity distributions within this document, however, equity agreements can be managed outside of the agreement.
In case a partner leaves your partnership, you may want to ensure that you have a clause that prevents you from competing against each other for a set period of time. Non-competes are also important for any sensitive business conversations where you will be divulging enough information to make your business vulnerable to competition.
It is critically important to understand how equity will work. While traditional partnerships require capital investments up front from partners, not all business arrangements require capital for equity. If there is a non-capital requirement in exchange for equity (sweat equity) detail the expectations for what the person will do for equity. Choose a method for determining their value and their expectations up front.
Intellectual Property and Trademark Agreements:
Be sure to protect your business with appropriate patents, trademark, and copyright agreements. In case of dissolution, detail in your operating agreement who will retain the intellectual property.
Teamwork Makes the Dream Work
The most important part of the partnership is the dynamic of the personalities and the ability to work together in good times and bad ones. If the team shares the same vision, work ethic, and understandings on how to treat each other when things get tough, it is far easier than going down the road competing with competitors and partners.
The road to cannabis entrepreneurship is paved with broken partnerships. Strong foundational documents are the difference between rescue and ruin. Litigation is expensive and getting cooperation from bitter partners to sign documents retroactively is a challenge. Protect yourself early.