How To Vet Your Social Equity Partner
By Lyneisha Watson
*When looking into any partnership, please speak to a professional and look into your rights reserved for equity partnerships in your state and municipality. This is not an exhaustive list of areas to consider and is not intended to be referred to as legal advice. Everyone mentioned in this article spoke from their own personal experiences, are not legal professionals, and are not offering legal advice.*
From slavery to Jim Crow to the war on drugs to 2020, Black and Brown people have continuously lived in a state of pandemic. The war on drugs unraveled already struggling communities of color, and now in 2020 we find ourselves facing two Americas: in some parts of the country Black and Brown folk are still 4x more likely to be arrested for cannabis possession1, yet in places where the legal cannabis industry is thriving Black people only own 4% of cannabis companies2. In an effort to seem progressive, many recreational and medical states are setting up social equity programs to reduce the barriers to entry that Black and Brown people face. With the industry set to generate $30B by 20253, there is plenty of wealth to go around and it is only fair that states take steps to make sure everyone, especially those from disproportionately impacted communities, gets their piece of the pie.
A fairly new concept, these programs vary depending on location. States like California are fraught with corruption and lack the capital it takes to truly elevate BIPOC. In April, a group of the 100 applicants vying for one of the 100 licenses to operate pot shops in Los Angeles sued the city because they deemed the process “flawed and unfairly implemented,” stating that certain applicants were able to access the portal before everyone else.4 “The city’s department of cannabis regulation recently proposed new rules for the program, including changes intended to prevent ‘predatory’ behavior from investors who partner with social equity applicants (SEAs). The changes include barring any conditions that would force a social equity applicant (SEA) to transfer his or her ownership,” wrote Adam Elmahrek.
As California deals with its own set of issues, many cannabis activists are looking to Illinois to provide a blueprint for creating social equity programs that center and elevate disproportionately impacted communities. The state set up an Expungement Initiative and require all 15 existing medical license holders — all white men — to pay fees to the Cannabis Business Development Fund, which provides grants and loans to applicants from poverty and violence-stricken areas throughout the state.
All in the industry are hopeful that cannabis will be federally legal in 2021. With all of the ups and downs that come with creating a fair industry, there is also hope that an ideal Social Equity Program is on the rise. Though it is clear that there can be many problems with Social Equity Programs, one of the biggest questions many face is how can they vet their social equity partners (SEPs) to make sure they are entering into a fair agreement that allows them true ownership in this space.
We spoke with Ed Brown, a partner with Original Social Equity Group based in San Francisco, California, Timeka Drew, an LA equity license holder, applicant, and compliance director, DeJanae Evins founder of Green Goddess Glow and a former potential equity partner and license applicant from South Central, and Parul Patel and Evan J. Hilton, owners of Mon Chéri Meds in Chicago, IL, about what potential Social Equity Applicants need to be aware of as they enter the industry, consider applying for different licenses, and vetting incubators, accelerators, and equity partners.
*The following are quotes from individual conversations conducted by Lyneisha Watson and Hilary L. Yu, EIC of Our Dream, that have been edited for clarity and length.
Understand the Types of Social Equity Programs
“There are a few types of social equity partnerships. I’m going to list the most popular three options.
The primary one is the incubator model where the incubator provides rent space or technical assistance that allows the SEA support through the license. In San Francisco, someone who wants to get into cannabis needs an SEA to receive a license. The benefit of that, for an SEA, it’s still your own business. The SEA has their own license to secure their rent, operate, and be in the game. There’s a separation of ownership and you don’t have to worry about management issues. A lot of times incubators can help share their business model.
The second type is a managerial relationship where SEA operates the license and uses the managing company’s IP [intellectual property]. The SEA can be hands-off and receive a pay-out through a management agreement or a community or management position, but don’t have true management decision-making authority. The benefit here is that the SEA can get an investment pay-out to let them use the license to reward them financially. Through this type of relationship, the SEA may also have access to a company that has a track record. You can be as hands-on or off as you want to be, but the benefit is that someone else is helping you build the value.
The third type is a large investor that wants to partner with you and you do it yourself. This is somewhat more challenging because you have more autonomy to put this together brick by brick, have full control, and learn each part. Whatever the equity applicant ends up doing and whatever you want out of these types of programs, it all needs to be in writing in your operating agreement.” – Ed Brown
“Keep in mind that while there may be three popular options of how to structure your partnership, there are endless ways we see partnerships negotiated all the time. It’s important that equity applicants who are future business partners in these companies understand that there are multiple ways to work together. It’s anecdotal, but sometimes it’s dangerous to tell equity applicants there’s only a certain way to go into business because if an SEA is presented a different type of structural opportunity, SEAs can think it’s fishy ‘cause they’ve never heard of it when in reality it could be a phenomenal proposal.
There are situations where you could work with the organization you are partnering with and maybe even also take equity in the larger company to roll your license in.
Sometimes partners will let you keep 100% of the business, but that’s because they are likely going to gut it with their fees or on your loan terms. Unfortunately, it’s not cut and dry. Based on the SEAs experience, there are ways they can be decision-makers. You may not be making day-to-day decisions, but you might have the opportunity to decide which community groups get supported by a percentage of sales for community reinvestment or nominate the first management team or crew of workers. There are a variety of ways people who have experience and those who don’t can participate in running their business.” – Timeka Drew
Share Your Vision Up Front
“Once you have a clear understanding of what social equity is and how social equity programs can uplift you and your community, then you must begin to get clear about your goals. You should begin by asking yourself the following questions:
- How does becoming a SEA play into your long-term goals?
- Are you someone who wants an active role in your partnership? Or do you want to play a more passive role?
- Do you want to be an employee? Or do you want to take the entrepreneurial route?
- Remember that there are no right or wrong answers to any of these questions. Your only goal here is to get clear about what your expectations are for the partnership.” – Timeka Drew
“It’s a business deal that you’re creating with this person. If you’re going into business together it’s important to be transparent about your intentions so your partner understands where you stand and your knowledge and expertise. It also sets expectations. Equity applicants need to have their vision intact so they know what their operations look like and potentially what the relationship looks like if it dissolves. It also sets the tone for negotiations and makes that process much easier.” – Ed Brown
“Expectations vary per SEA, many of our SEA clients that we’ve consulted with in the past weren’t involved in the cannabis industry directly up until the opportunity arose so they already had careers and didn’t want much of the day to day involvement. So that is reflected as a ‘passive owner,’ but doesn’t take away from their value in establishing licenses which I preach warrants their fair share of equity. For some who want to be fully involved or have a close family/friend who they would ideally want to manage the day to day operations, that warrants more long term goals, higher equity ownership, and more opinion on the direction of the license.” – Evan J. Hilton
There Should Be Transparency Between Both Parties — Not Just The Applicant
“The beginning of your partnership is going to require a great deal of transparency and vulnerability on both ends. You should be looking for a partner with a thorough resume, a solid business structure, and genuine integrity. Don’t be afraid to ask questions about their other licenses, and all of the other partners/LLC’s involved.” – Timeka Drew
“It is important to be transparent in all we do especially if we are looking to expand in the Black and Brown communities. Sharing your vision is very important because you have to align your vision with the equity partner, if it doesn’t align, there will be problems down the road.” – Parul Patel
“These decisions affect how the community will be shaped moving forward. If we want real change and evolution of these communities, the voices of those who have lived and seen the harsh impact are the only real important opinions at the end of the day. Implementing these opinions is crucial and it will make or break what has ‘traditionally’ been done.” – Evan J. Hilton
Get Those Receipts
“Get everything in writing. Whatever it is you want from this partnership or have been offered, it needs to either be recorded with your potential future partner’s consent or in an email chain. When contracts come into play, it doesn’t matter what you were promised or told if it’s not in your operating agreement, ‘cause you can’t take what someone said to you and use that in the court of law with a real chance of winning,” – DeJanae Evins
Speak To A Lawyer Or Consultant
“Your vision becomes incredibly important. Once you and your partner have become clear about your goals and expectations, it is time to contact a lawyer or a consultant. In most cases, your partner should be willing to share resources to make it so they make a good decision and help either negotiate your LOI and operating agreement.” -Timeka Drew
“You want to make sure you have your own team to review the documents to ensure you are understanding everything at a ground level along with the long term vision, making sure there isn’t anything that may be limiting you from progressing as the licensed entity.” – Parul Patel
“At the end of the day, an equity applicant by definition is someone who doesn’t have resources, they are low income or formerly incarcerated. Often it’s someone who falls in the lower income scale. Few equity applicants have a layman that understands the ramifications of what this entails, all of these things need to be broken down by a professional. A lot of times these incubators often use their lawyer to draft the agreements, but you need your own representation. I’m not saying these cats are doing anything wrong off the bat, but you need to have your own representation because there are things people don’t think about like operational control vs revenue split. You need someone fighting for your interests. A lot of cities in California like San Francisco and Oakland have set aside assistance to help with pro bono lawyers SEAs can call on. SEAs need to know how regular business works and you need to have an advocate. This is now a regulated market and we need to work as professionals. You can get pushed out of your own companies.
San Francisco has said an SEA’s equity can’t go below 40% or else they have to turn in the license, so the city looks out for them by providing legal resources. It ties back into your vision, if you want a legacy business and you want to learn about every aspect, then that vision needs to be in your operating agreement so that you have that control to do marketing and hire employees. A lot of people want to hire from their own circles, then that needs to be in the operating agreement. You want someone to take your vision and protect you.” – Ed Brown
“The most shocking types of potential partners are the groups who don’t want to pay the SEA’s legal fees or only want to pay a lawyer to the extent that the lawyer is just explaining the contract and now negotiating on your behalf. You are signing a document that could potentially put you in a lot of harm’s way or implicate you for taxes or to take responsibility for a lawsuit and if you don’t have someone to help iron that out, that’s problematic.” – DeJanae Evins
A Few More Things To Consider
Devil’s In the Details
“We want to see supportive terms – partnerships that allow both parties to participate & take into account what they both bring to the table. For example, if a partnership involves a loan, how rigid are those loan terms? How low is the interest rate and how long do you have to pay it back? For social equity, loans should have longer payback schedules, not include prepayment penalties, and have lower interest rates than normal cannabis lending.
How will the partner help if the loan is difficult to pay? Does the partner help pay the loan in any way? What are the default terms? Any partner trying to take a license away from an applicant when defaulting on difficult to satiate loan terms is a predatory partner. Also, how much control does the social equity applicant maintain in the business? Can they be voted out? Can they be removed from the company somehow? These are red flags.” – Timeka Drew
“These are a few questions to make sure your lawyer is covering [this isn’t an exhaustive list] and that you and your lawyer should discuss together. For example, if someone sues your company that you have majority equity in ‘cause you’re an equity applicant, are you solely liable should someone have a legal issue with the company? Or when it comes down to paying taxes, who is covering the taxes and ensuring that tax structuring is done correctly? Taxes are a huge financial burden to put on someone who likely doesn’t understand the tax implications if this is the SEA’s first time running a business.” – DeJanae Evins
The Types of Documents You’ll Receive
“You will receive an operating agreement, which is a 90-150 page document. Make sure you get an LOI (letter of intent) as well that explains in plain terms what deal points you can speak about. Some groups will just give you a whole contract and MSA that’s 120 pages and a 1-2 term sheet that shows you the kind of transaction. This is where your lawyer or consultant will be incredibly useful.” – Timeka Drew
Google Is Your Friend
“Do a hardcore google search of the company and CEO. Nefarious characters will often have other dings on their management history.” – Timeka Drew
Remember Who You Are In The Room & Be Willing to Walk Away
“If someone tells you to sign an agreement on the spot and that there’s no appetite to negotiate, it should be an immediate ‘no’. These types of companies think they’re doing you a favor, but the investment they are making in you now is minuscule in comparison to the returns they will be getting in the coming years. As a future equity partner and license applicant, you should be treated with the utmost respect and dignity. Remember they ultimately need you. Do not let anyone diminish your self-worth or speak to you in a condescending manner like they’re saving you.
Yes, with risk comes reward, but the SEA needs to know when the risk is not worth it and that it’s okay to walk away from a deal.” – DeJanae Evins
1 “Marijuana Arrests by the Numbers.” American Civil Liberties Union.
2 “Chart: Percentage of Cannabis Business Owners and Founders by Race.” Marijuana Business Daily, 14 Sept. 2017.
3 “U.S. Cannabis Industry Market Projections Up 20% to $30 Billion by 2025.” Newfrontierdata.com.
4 Elmahrek, Adam. “L.A.’s ‘social equity’ program for cannabis licenses under scrutiny.” Los Angeles Times. 23 June 2020. https://www.latimes.com/california/story/2020-06-23/cannabis-licenses-social-equity-4th-mvmt
*These interviews were conducted exclusively with individuals we love and respect in the cannabis space. OUR DREAM does not receive any compensation for this content.