Building a team before receiving the license

A proper LOI can limit problems with hiring

Anyone who has worked through the mechanics of applying for a cannabis business license has been required to disclose to the applicable regulatory authorities the names and qualifications of various team members. In heavily competitive medical cannabis states, such as New Jersey, Pennsylvania and Maryland, the team makeup comprises a hefty percentage of an applicant’s total score, while in less restrictive adult-use markets, such as California and Massachusetts, the makeup of a team might not be scored, but regulators are tasked with assuring that applicants’ respective team members satisfy state requirements, do not meet any disqualifying factors and are otherwise “suitable” to operate a heavily regulated business.

However, because the application phase precedes revenue, prospective cannabis business operators are faced with a fairly unique business conundrum: how to staff the operation with talented and experienced individuals without a revenue stream — and without knowing whether or when a license will be awarded.

This predicament is solvable by utilizing a “letter of intent” (also known as an LOI, offer letter or term sheet) for potential team members, which secures the talent, enables applicants to disclose such individuals to regulatory authorities and contains a variety of protective provisions for both the company and the prospective new hire. The LOI promises employment, provided that a license to operate a cannabis business is awarded, and may save applicants significant legal costs associated with preparing and negotiating formal employment/consulting agreements and incentive plans.

Below are a handful of provisions worth including in an LOI:

– Critical to a pre-license LOI is its contingent nature. Applicants should not be required to employ or appoint an individual to the team if they are unsuccessful in obtaining a license. Thus, the offer of employment should be couched in contingent language, such as: “this offer is contingent upon securing a license under [enter applicable regulation].”

Employment offers should also be contingent upon, among other things, the recruit’s: compliance with applicable state law; successful completion of any required training; and mutual execution of a formal employment or consulting agreement (which will inevitably contain more robust provisions than the LOI).

– Another essential component to the LOI is a provision allowing the applicant to disclose a prospective employee’s (or contractor’s, adviser’s, officer’s or director’s) name, photograph and biographical information in connection with the application (likely, for fundraising purposes as well). To this end, the LOI should contain publicity language, granting the applicant a license to use personal information for any business-related purpose or in connection with the instant effort to obtain a license.

On a related measure, the contingent LOI should also set forth some detail concerning the primary duties of employment, enabling the applicant to weave such information into a staffing plan or similar narrative, as the application may require.

– While finding individuals with hands-on experience in cannabis is getting easier as medical cannabis and adult-use programs expand across the nation, the industry is still relatively small and rife with conflicts of interest, compared to other multibillion-dollar industries. To this end, applicants should include in their contingent LOIs language requiring recruits to represent that they are able to accept the position and carry out the work that it will involve without breaching any legal restrictions on their activities, such as confidentiality, non-competition, non-solicitation and/or other work-related restrictions imposed by a current or former employer.

In competitive markets, subject to applicable state laws, applicants may want to impose their own restrictions upon recruits and preclude them from also teaming up with a competitor through the application process.

– Successful team building requires license applicants to disclose to recruits what sets their operation apart from their competitors — information that may be sensitive or confidential. Accordingly, the LOI should also contain a provision requiring mutual execution of a non-disclosure agreement, protecting the applicant’s confidential information and intellectual property.

– The license applicant may want the recruit to provide a variety of pre-licensing services, such as the review of and comment upon the application, assistance with further recruiting or fundraising efforts (subject to securities laws), strategic introductions or the preliminary design and development of marketing collateral, etc. These services should be clearly spelled out in the LOI and supported with some form of compensation to assure enforceability.

Lastly, while resolution of a potential dispute is the last thing that a prospective operator wants to think about while under pressure to submit an application, it is important to establish a dispute resolution mechanism, in order to provide some stability to the contingent relationship. In this regard, consider including a provision for mandatory confidential alternative dispute resolution. Such a provision could require the parties to negotiate in good faith, mediate and/or arbitrate a dispute, thus saving time, money and public litigation.

Ultimately, do not allow the infancy of a prospective operation to hinder successful team building. With a few simple and thoughtful provisions, it is possible to forge a pre-license Dream Team.

 

Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a white-shoe boutique firm with a track record for success and handling sophisticated legal matters that include business and corporate law.

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