It is often said that life is a game of power and while certain individuals may not choose to live his/her life according to this Machiavellian principle, many others have no greater imperative. Cannabis Startups are of course are no different and as a company increases its number of partners and investors, conflict will inevitably ensue and power struggles will manifest.
The Board and its Fundamental Purpose
As most Cannabis Startups establish as C-Corps (for reasons discussed Here), they are now legally required to form a board of directors. Principally, startups should ensure that its board consists of roughly 5-9 members who between them represent an accumulated skill set in a variety of areas of expertise. Each board member should ideally possess a unique and desirable attribute that will facilitate high-level strategizing and decision-making required for a burgeoning start up company. More on this later.
The Trump Card
One of the most hotly negotiated areas of any startup deal is the number of representatives a VC firm has on the startup’s board and their collective decision making power. The critical point to remember is that board members are ultimately charged with steering the ship and making tough choices on behalf of the company’s investors. Indeed, the board wields a tremendous amount of influence in the governance of the company and should be structured with immense care and prudence.
The Unitary Model
Startups in the United States generally operate according to a unitary model whereby each member has an equally potent vote. Naturally, this model dictates a strength by numbers strategy and compels aggressive VC firms to push for a majority representation on the board. Founders, conversely, will negotiate to minimize the VC firm’s representation on the board in an effort to retain the original founders’ authority. If a founder/s loses control of the board, he/they will be at the mercy of the controlling members who may very well have a different vision of how the startup should function and potentially, terminate.
Everything is Negotiable
It is critical for cannabis startups to remember that there really are no rules (barring specific legal specifications) during the negotiating process of the deal. Complex negotiations between startups and investors involve compromise and disappointment in an effort to maximize the fruition of competing objectives.