So you have an amazing idea for a new cannabis company that no one has thought of yet. You have the idea, and you may even have a team ready to work on the booming green rush that’s happening in the U.S. and many countries all over the world…
But do you have the money? Do you have the investments and capital you need to drive your business to the next level and achieve success? This article is for serious cannabis startup entrepreneurs – Abe Cohn from THC Legal Group in Cleveland, Ohio, is here to give you some advice on how to raise capital in exchange for equity in your brand-spanking-new company, or through convertible equity. Read on for a quick education in financing your new cannabis venture.
I asked Abe a number of questions, and here are his answers:
How Can I Raise Money (Capital) for My Cannabis Startup?
Cannabis startups, like all startups, require outside money or capital from investors to launch their businesses. Loan instruments and investments are two excellent ways to obtain capital to invest in your cannabis startup. While loans ultimately need to be paid back with interest, the startups funded this way will always maintain ownership of the entire company. Investors who grant capital in exchange for an equity stake in the company may not need loan repayment, because a successful company repays that loan many times over in stock options. Depending on needs of the startup and its perceived worth at the time of founding, company owners must decide which type of capital works for them. Another option is equity in the company itself.
How Can I Sell Equity in My Company to Start My Cannabis Business?
Equity is essentially part ownership in a company that is usually given to an investor in exchange for money to invest in your cannabis startup. Why would an investor just give you money for your cannabis startup? Because investors who give you money (investments) in exchange for an equity stake in your cannabis startup are effectively placing a bet that you will succeed. If you do, they will be paid back many times over, giving them more money in the end than they invested in your startup. Equity may give your investors voting rights in key company decisions, a dividend (monthly payment from the company’s profits), or the right to liquidate their assets in the company if it is sold.
How Does Equity Work for My Cannabis Startup?
For a cannabis startup structuring its company as a Corporation, equity is referred to as stock; typically, the two classes of stock are common stock and preferred stock. The founders of a company hold common stock, and the transaction costs of common equity are lower than those of preferred equity. Preferred stock, is an alternative ownership class with greater administrative and financial rights which has higher transaction costs. Preferred equity is more appealing to investors because it provides greater protective measures for investors’ money. For instance, holders of preferred stock may be prioritized over common stock holders if the company is sold or liquidated – that means they get their money first. Preferred stock may have right to veto company actions they dislike.
What Are Some Other Ways to Get to Equity for My Cannabis Startup?
Convertible notes are initial loan offerings that convert into equity when the cannabis startup raises an agreed-upon amount of funds or satisfies another pre-determined condition. When conversion occurs, the startup no longer owes the convertible note holder the loan but instead grants the convertible note holder an equity stake in the company. With convertible notes, there is no investor assessment of company worth at the time of granting money – instead, the valuation will be made later and the investor can make sure the company is worthwhile before turning their “loan” into an investment.
Convertible equity offers investors the right to buy preferred equity when a predetermined event occurs. Convertible equity does not require loan repayment and allows companies to avoid starting out in debt to their investors. A common type of convertible equity is SAFE (simple agreement for future equity).
But, How Do I Know Which Investment Path to Take?
Based on your cannabis startup’s particular goals and needs, you should choose one investment path. Ask yourself these questions: How much money do you need right now? Can you negotiate equity based on a high company valuation? Can you expect to convince investors to invest, rather than loan you money? Please consider these questions carefully – your business depends on it.
Abe Cohn manages THC Legal Group, a team of Cannabis Lawyers providing legal services to the cannabis industry.
[Featured image credit- Pixabay]