When I receive a summary of a cannabis business deal–the first emails, calls, LOIs, and term sheet in any form–with 90% accuracy I can say whether the transaction will be a difficult one or not. Note that “difficult” does not correlate with complex: Often the more complex deals, with multiple entities and asset transfers, end up being much easier, whereas a simple secured loan can be more difficult. And in the context of a transaction, “difficult” = “time consuming” = unnecessary expense. Everyone would like to avoid that.
The number one differentiating and determinative factor in assessing the difficulty of a marijuana business deal is the term sheet. If a deal is a building, think of the term sheet as both the architect’s blueprint and the physical foundation on which the deal is built. Deals that are smooth are built with a clear plan and on a solid base; these come in on time and under budget. Deals that are built based on a vague understanding of the final goal but with no firm, documented plan, will be typified by stops and starts, walls built, torn down and rebuilt, and a final product that stands but doesn’t resemble what either parties had in mind (“in mind” being a key phrase here, as often what was in the parties’ mind was never exchanged in an agreement). Oh, and the dreaded cost overruns.
Engage your attorney before you sign a term sheet.
Having a final term sheet is necessary for a smooth transaction, but agreeing that a half-baked term sheet is “final” may prove worse than having no term sheet at all. Do not make the mistake of thinking you cannot engage your attorney until you have a term sheet signed: In fact, an hour with your attorney before you finalize the terms, could save you many hours down the line. Your experienced business attorney will know how the terms will fit in the documents, and in turn what terms you may not have addressed fully, or at all.
Do not have your attorney draft the transaction documents until after you sign a comprehensive and binding term sheet.
Speed in transactions is defined by certainty. Term sheets that say “market standard” terms for X is likely a proxy for “we didn’t take the time to discuss X.” This can work if the parties have a common reference point or an external reference. For example, in the context of an equity financing, “standard NVCA language on Registration Rights” is OK. “Standard anti-dilution” is not OK: There are at least three flavors and they are wildly different, so the drafting attorney with that term sheet is guessing–or likely talking only to his side–on the issue. The stops, starts, and re-drafts is what eats up time.
Continuing with the building analogy: Every couple building their dream home wants the house built quickly and correctly, and on budget. But they had better get all the critical details decided and in the plans before the first brick is laid. In other words, if you don’t agree on the location and number of bathrooms, you wouldn’t tell a contractor to “start building now and we’ll decide on the bathrooms later.” The decisions won’t get easier if you put them off, and having a full plan in place from the beginning will make the process more enjoyable for all.