In the past few weeks we have been working with a number of cannabis clients in similar tough spots. They didn’t want to spend a lot of early money on lawyers, so they negotiated some service contracts on their own. These contracts are generally with “cannabis consultants” to help in the financial space — either providing CFO-level support or brokering investments or fixing up the company books. These are the type of business tasks for which a number of cannabis businesses hire outside cannabis expertise. Just like any arrangement, these deals can and often do go south. The investment broker doesn’t produce, or the outside CFO that presented as an expert turns out to offer subpar performance. The cannabis business is then looking at a contract calling for huge payments to an individual that is not providing the level of service the business wanted. It’s tempting to ignore the problem, stop paying on the contract, and hope the consultant goes away. But they never do. They come back and demand money despite their own lack of performance, and they threaten to sue.
How can you avoid this?
First, it’s important to realize how businesses can get into this position. An annoying but useful cliché: “If you enter a poker game and you don’t see a sucker, get up and leave — you’re it.” When an inexperienced entrepreneur sits down with someone promising to turn their business into a financial juggernaut, the possibilities can be enticing. The “financial expert” talks about “partnership” and about how much money everyone is going to make and how magnificent the possibilities are. But when it comes down to it, a self-interested consultant wants to get the most it can out of a business in exchange for promising the least amount of work. Too often, the terms of offered agreements tilt entirely in the consultant’s favor. Too often the consultant is also a cannabis industry novice, looking to make a fast buck in this nascent industry. The cannabis company must be diligent to make sure that the written contract it is signing promises the value the consultant is orally promising.
Here are some of the key things you should look out for:
Poorly defined service list. If you’re going to pay someone $10,000 per month, you should at least nail down what they have to do to earn the money. Too often we have seen something like: “Provide ongoing expertise on financial matters to the company.” And that’s it. That just isn’t enough to justify the contract. Businesses that hire consultants need to really hone in on either the required services or the demanded results. You can mandate a certain number of hours per week that must be spent on your site. Or weekly progress reports. The alternative is to set up clear goals, such as “Consultant will have fully trained company management in use of financial tracking software by October 1,” or “Broker will have sourced one million dollars from accredited investors by the end of the year.” There needs to be a goal line so that the company can clearly say that the consultant either has or has not performed under the agreement, and this line needs to be placed clearly in the agreement. It can’t be based on oral representations made outside of the contract.
High costs and equity suck. Paying huge monthly fees for consulting service is one thing, but it’s important to read the fine print, especially if the consultant is from out of state. Paying for mandatory first class airfare and five-star hotels can get a little spendy. Even worse are when the contracts allow the consultant to start taking unreasonable amounts of equity in the company, especially when combined with a poorly defined service list. Cannabis businesses need to know exactly what their financial and equity outlay is before they execute the agreement.
Unclear term or termination. Consulting agreements that don’t have an end date or a specific provision on termination can be really scary, because it feels like there’s no way out. Even worse are contracts that state termination can only occur “for cause,” where cause is not defined. Again, these provisions have to be made abundantly clear on execution and these provisions should favor you, not your consultant.
Even in cases where a business enters into a bad deal, hiding its head in the sand is a really bad option. Termination clause or not, once you want to stop using a consultant, you need to say so and then figure out the best way to do so. This is the only way to extricate the company from a mess and keep from accruing month after month of charges for “work” when the business isn’t seeing value. Even for a deal where the mechanism of termination is unclear, a notice of cancellation is almost always better than the status quo.