Cannabis Investment Basics: Debt v. Equity
Towards the end of 2019, it seemed that cannabis investments had all but dried up. Today, our cannabis lawyers are seeing a huge uptick in investment transactions of all kinds in cannabis and hemp businesses. With investments on the rise again, we plan to do more posts on various legal aspects of cannabis investments. At the outset, it’s best to understand some fundamentals, and the best place to start is looking at the question of debt vs. equity.
It is extremely common for cannabis businesses (and especially startups) to raise capital through issuing equity (i.e., stocks in a corporation or membership interest in a limited liability company, or “LLC”). Typically, startups seek to offer a significant chunk of equity in exchange for a large monetary investment that can be used to cover initial operating or startup costs (think of things like costly tenant improvements that virtually all cannabis licensees are required to make in order to get a permit and start operating). Generally, these equity offerings are of a not insignificant amount, and we’ve seen a lot of businesses offer close to half of the equity in the business to an investor. This makes sense from a common-sense point