Link to the blog on key differences between the standard SAFE vs Cannabis SAFE.
Really enjoyed chatting with David Hua (Meadow) and Jason Kornfeld (Mayfield Venture Law) on the Cannabis SAFE last week, a few people have asked for the notes, so sending it out as part of the newsletter (while also testing the substack Podcast feature). If you listen to most of it, shoot me a note so I know people are interested in this content format, as well as the blog/newsletter. I’ve considered video as well but think there’s more opportunities to listen to content (even without the work commute at this time). Any feedback (by replying to this email) would be greatly appreciated!
0:42 / Born out of the work from Meadow’s own fundraising experience
2:16 / Lowering Cost of Capital (almost no cost to raise capital)
3:13 / Highlighting risk factors specific to Cannabis
4:45 / Keep an eye out for Social Equity ownership requirement
6:37 / Meadow has shared with State/Local regulators so they’re aware of document
7:27 / YC now has 8 or 9 Cannabis-related portfolio companies right now and was helpful in allowing Meadow to open-source the document
9:30 / Meadow raised in 2015 and used the standard SAFE as an ancillary company
10:25 / Hua’s wife runs Mellows (cannabis-infused marshmallows) and has been using the Cannabis SAFE to raise a bit over $1M from angel investors
11:25 / Cap and no discount is common with the SAFE, Cap + Discount usually used during a bridge round given questions around valuation / size of next round
13:00 / Depends on valuation (doesn’t make sense to give discount with small raise)
14:30 / Cannabis SAFE conversion math
20:00 / Lawyers will make introductions if you ask
22:30 / Three buckets that accountants fall under for 280E treatment (conservative, creative, disregard), most falling in the middle bucket
25:30 / Licensing (co-manufacturing) or Licensed Manufacturer?
27:30 / Quality control is main benefits to having license
28:30 / “scale” around $10M+ Revenue
29:17 / Watch out for dilution, especially for equity applicants
32:30 / Cap table management software
Section 280E of the Internal Revenue Code (IRC) prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal business expenses (such as payroll and rent), from gross profit (revenue less cost of goods sold). Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (IRS) has subsequently applied Section 280E to state legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state taxes. This severely impacts dispensaries, as opposed to cultivators and producers (since most expenses can fall under COGS – mainly inventory costs, which include the cost of the actual product, the cost of shipping (to the retail location), and any directly related expenses). Typically, cannabis business owners end up paying tax rates that are 70%+, 2–3x more than the tax rates paid by non-cannabis business owners.
This is something Harborside has been battling and I’ve been tracking to see how it plays out (as its a huge overhang on the Company and other potential retailers looking to sell).
Cap Table Management:
Most companies use either Carta or Captable.io. Start on Captable.io and switch to Carta (free up to 25 security holders) after you’ve raised your round. Captable.io also has scenario modeling which helps understand valuation / dilution. Try not to use excel if you can help it.