Legal Advice for Cannabis Startups: First, Invest. Then, Stay out of Jail.

“You want extra attorneys” is a phrase most early-stage startup CEOs by no means need to hear, and for good purpose: It often means one thing has gone horribly unsuitable.
As an angel investor and advisor, I by no means anticipated (or wished) to need to say it to a founder. Then I based Gateway.

Gateway is an early-stage accelerator for startups within the hashish trade, and though there are numerous similarities between beginning a hashish firm versus a expertise firm, there are additionally crucial variations.
Sometimes, expertise founders are taught to deal with authorized particulars round firm formation significantly, however on the similar time to reduce authorized bills. Typically this implies utilizing companies like Cooley GO or StartupDocuments for preliminary formation, however saving the big-name companies for in a while, as soon as fundraising begins.
Alternatively, it could actually imply using a deferred-fee program with a view to skimp now and pay later. The issue with this technique for hashish startups, particularly corporations that “contact the plant,” is that whereas the large names in Silicon Valley are all competent companies, they know virtually nothing about hashish legislation, and are often bored with studying.
That is an actual downside, as a result of whereas screwing up firm formation can price you cash, screwing up compliance with hashish legislation can land you in jail.
Founders attempt to remedy this downside by hiring attorneys who specialise in hashish legislation, which is a superb thought that may undoubtedly provide help to to keep away from jail (and to take care of unconventional hashish tax legislation). For those who’re not attempting to construct the form of scalable firm that can search enterprise capital sometime, these attorneys may be sufficient.
However for those who plan to boost enterprise cash and construct the following Starbucks of hashish, it’s possible you’ll run into issues that your hashish attorneys have bother anticipating. A few of these are small and solvable, like ensuring you will have a separate out of your (or different authorized entity required by your state).
Guarantee that the settlement between these entities is obvious and tight, with as a lot worth as doable accruing to the investable C-corp. Different issues may be harder to unravel retroactively, comparable to the necessity to right a messy capitalization desk. Definitely, you’d slightly have Fenwick & West sitting throughout the desk out of your first institutional investor than an amazing hashish lawyer with little expertise negotiating a Sequence A.
That is why, for corporations that “contact the plant,” we at Gateway suggest one thing uncommon: two units of attorneys. Sure, that may be extra pricey, however it could actually additionally hold you out of jail and be sure that you look as enticing as doable to potential traders, no less than from a authorized perspective. Finally, it is best to make the time dedication to handle two authorized groups. And, en route, you might want to perceive every crew’s space of accountability, in addition to how and when the groups overlap by way of work. As a hashish founder, you will possible discover that spending additional time on authorized work is unavoidable.
Different points that needs to be in your radar embrace:
Incompatible Authorized Templates
Most templates for authorized agreements comprise a reasonable-sounding clause prohibiting the events from participating in any actions “in violation of federal legislation.” This usually makes excellent sense, however as a hashish firm you might want to scrutinize leases, employment agreements, formation paperwork and different contracts to guarantee that an exception is made that can allow you to do precisely that.
Reliance on Courts
Though a hashish enterprise could have a authorized contract, within the occasion of a dispute, a federal courtroom could not hear the case if it is linked to a federally criminal activity — which promoting hashish is. We suggest together with arbitration clauses in all of your contracts to maintain disputes out of the courts as a lot as doable (even this does not all the time work).
Native Politics
As PJ O’Rourke as soon as wrote, “When shopping for and promoting are managed by laws, the primary issues to be purchased and bought are legislators.” A cloth impression of federal prohibition is that native governments — cities and counties — usually view the exploding hashish trade as a chance for graft. Petty metropolis council members with no understanding of enterprise (not to mention of hashish) weasel their means into the ensuing energy vacuum and sponsor ridiculous, ill-conceived, and sometimes damaging native laws.
Their sole goal, nonetheless, is both grandstanding for his or her subsequent election or rewarding explicit companies and buddies. Authorized ambiguity from above begets native authorities at its worst. You have to take note of what’s taking place domestically on the state degree in addition to the federal one.
Native politics do not finish on the metropolis council assembly.  Hashish corporations may be routinely harassed by native legislation enforcement no matter state legislation. Evangelical sheriffs, armed with a dubiously credible “tip” about some trivial violation, their very own spiritual conviction and civil asset forfeiture legislation, may simply select to raid a hashish firm and steal — oops, I imply confiscate — every little thing in sight. Simply ask the or extra lately, and .
In truth, the founders of one in all our accelerator corporations determined to maneuver his complete enterprise and household a number of hundred miles to a friendlier jurisdiction, simply so everybody might sleep a bit extra peacefully at evening.
All of this can be an unfair burden, however it should not deter a founder enthusiastic about constructing the following huge hashish firm; the chance vastly outstrips the danger. For those who’re aspiring to be that founder, simply ensure you have a agency grasp of how the evolving legislation applies to you. And yeah, you may want extra attorneys.

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