Marijuana Business Magazine - April 2018

THE CONTRACT A fter picking a law-abiding company with adequate financial resources, it’s time to nail down the details of an agreement through a contract. It can protect your busi- ness should a relationship turn sour. In addition to laying out the financial terms of the deal, which typically include an up-front payment and royalties, a contract should detail provisions such as escape clauses, quality standards and minimum sales targets. “Everyone needs to know their goals going into the deal,” said David Sutton, president and chief operating officer of NanoSphere Health Sciences, a Denver biotech firm that uses nanotechnology to deliver cannabis medications. “A lot of it is tied up with who owns the IP (intellectual prop- erty), and that needs to be clearly identified.” NanoSphere’s contracts give the company full audit control with a clause giving it the right to inspect its partners’ facilities with 24 hours notice. The contracts also detail what occurs if there is a breach, how long the partner has to correct its mistakes and what to do if the company is no longer an appropriate partner. “We provide all the equipment to manufacture, and we can pull all of our equipment out,” Sutton said. It’s a measure NanoSphere had to take with its first Colorado partner. There was a disagreement over the intellectual property. NanoSphere’s partner company believed it owned the intellectual property. “We said, ‘No, you have to invest in it at a discounted rate,’” Sutton said. “Our original investors put money into helping us develop the IP, and we didn’t see how our licensee had ownership rights. They held our equipment hostage for six months and locked us out of the facility. We didn’t say they couldn’t have it. We just said they couldn’t have it for free.” Nancy Whiteman, co-founder of Colorado edibles company Wana Brands, said con- tracts should spell out the products covered by the agreement, whether it’s exclusive or not, the relevant territory as well as up-front fees and royalties. In her company’s case, it’s also important to clearly define standard operating procedures and how Wana Brands will audit its partners to ensure they’re com- plying with the SOPs. “There needs to be agreement between partners about how success or nonsuccess is measured,” she said. “There should be some sort of process built in where we can say as a brand that you’re doing a good job or not. We care a lot about noncompetes and that sort of language.” Matthew Abel, founding attorney of Detroit-based Can- nabis Counsel, insists that any company he represents includes language in its contracts that require the products measure up to specifications, the packaging is approved, and that only authorized logos and recipes are used. “Basically, you don’t want them to dilute the brand or bastardize it in any way,” he said. “I would insist that the company make a quality product and that the par- ent company have the right to pull the license if they don’t. You can really hurt a brand by having inconsistent product.” – Margaret Jackson how their companies operate. “A red flag would be a lack of trans- parency,” Sutton said. “If you’re not open to how you run your business, how you run your books, that’s a big warning flag for us. It usually means they’re doing something they feel they need to keep away from the public eye.” Potential partners also must follow the state’s regulations to the letter, said Sutton, who recalls vetting companies in Colorado when he was first looking for partners. Many of them had started in the black market before the state legalized cannabis for recreational use. “They still had shadows or hints of their past lingering in their cur- rent operations,” Sutton said. “They were not following the rules.They were skirting a lot of the regulatory requirements, skirting in testing and advertising.” Sutton said he’s found that people who had never been in the industry Wana Brands co-founder Nancy Whiteman looks for partners that will be good brand stewards. Photo courtesy of Wana Brands and were just starting companies often make better partners than those who grew up in the black market. “They’re coming from outside the industry and starting fresh,” Sutton said. “They bring a sense of organ- ized business.They bring the values and the organization from corporate America or even mainstream America into cannabis, and it shows in how they account for things and how they man- age their businesses.” ◆ 74 • Marijuana Business Magazine • April 2018