How To Avoid Costly Marijuana Business Disputes

Plan now to avoid a cannabis business war later.
Get your cannabis business agreements in writing now so as to avoid a costly war later.

Our cannabis lawyers are in the midst of working with a number of our clients on messy partnership disputes right now. I cannot talk about those cases, but I can talk generally about the large number of such matters we see and of how nearly all of them could have been avoided with a modicum of preparation and foresight. But they weren’t, and they spawned costly disputes, including litigation. So, I thought I would bang the drum again on encouraging everyone involved in the cannabis industry to be sure you have some clearly written out terms and conditions governing the relationships among your marijuana business’s equity holders, lenders, and corporate officers.

In a couple of these matters (whose facts have been changed so as to avoid revealing any confidences, but not so much as to blunt the value of the story) we had the classic example of someone relatively new to business that hasn’t been burned in the past. Our client was approached by a marijuana cultivation and processing business with big ideas and a reasonable business plan. In initial talks, the owner of the cultivation business told a potential investor that the company just needed a minor capital infusion of about $150k and then the business would come together and start generating tons of profits. That sounded like a great deal to the investor, who forked over the cash.

There was, however, a big problem: no written document was ever drafted that defined what the investors would be getting for their money. It was not even clear what we should have presumed in that circumstance. Did the investors contribute their capital for some type of proportional equity share in the cannabis business? Was it a loan? Was it something completely different? These may sound like extreme examples, but this sort of thing is happening constantly in the marijuana business — way way way more often than in any other industry of which we are aware. Maybe the illegal market and medical cannabis communities that some of these companies and investors worked in previously have better trust relationships than you see in other business communities. Regardless of the reason, there are a surprising number of people in the marijuana industry willing to write six and seven figure checks without any written reassurances on when or how they will be paid back.

Nearly all of the investor/partnership disputes we see could have been avoided if the parties had only remembered the basics of negotiating contracts of any form. Do not sign anything or pay any money unless you can clearly answer these questions and be confident that the other side would have the same answers:

1. What exactly am I giving up in this deal?

2. When am I expected to give it up?

3. What is the other side giving up in this deal?

4. When is the other side expected to give that up?

5. Do we have a well-crafted, professionally drafted agreement reflecting the above and all other critical deal points.

So to any of you in the cannabis industry with financing, equity, partnership, etc. waiting in the wings or floating along in an undefined way: You can only tread water with those things for so long, and not defining the scope of someone’s relationship with the business can and will lead to litigation, especially when the business is doing extremely well (see Winklevoss vs. Facebook) or extremely poorly (much more likely). Figure out now where everyone stands and have that documented appropriately, as doing so will save yourself a world of heartbreak and litigation in the future.

For more on what you can and should be doing now to prevent legal issues later, check out the following:

Avoiding legal problems for your cannabis business is time-consuming and complicated, but now that you are a real business, you really have no choice.