3 Things You Need for a Cannabis Startup in California

Licenses, liquidity, and lawyers

By Trevor Kupfer

It should go without saying that a startup venture needs a lot to get up and running: real estate, marketing, staff, permissions, plans—the list goes on. But the cannabis industry is even more complex, says Kimberly R. Simms, an attorney who has advised California marijuana and hemp businesses since 2009.

“There are so many nuances, regulations, and things that get misconstrued,” she says. “Unless you’re immersed in the cannabis industry, you’re not going to know.”

At the most basic level, three things any hopeful cannabis startup needs are: access to significant funds, state and local licenses, and reputable legal counsel. “I couldn’t stress the importance of finding an attorney experienced in cannabis enough,” Simms says.

Getting a License

Simms works with clients at all stages of the business life cycle—from startup to mergers and acquisitions. “In the beginning,” she says, “they need a lot of help to understand what the regulatory system looks like in California. It’s a lot of initial consulting on explaining the landscape, setting up corporate entities, and working to get their licensing.”

California has a dual licensing process that “goes from the bottom up,” Simms continues. “So your local permit must come before you apply for the state. Every city and county gets to make their own rules, so there’s a lot of work to help folks navigate which city or county might allow the commercial cannabis entity they’re interested in. Then we look at things like land use and zoning, and local tax rates.”

In Chula Vista, for example, the local application process asks for full operations plans and business plans. Meanwhile, the state application requires coordinating with three regulatory agencies: The Bureau of Cannabis Control, Manufactured Cannabis Safety Branch, and CalCannabis.

“They each have their own set of regulations, and those regulations on the same issue or topic can differ,” says Simms. “It’s not that the regulations are onerous, per se, but if you operate with multiple licenses, the way you deal with each issue may have slight variations.”

As a result, there’s a lot of strategy involved in entity formation—in what type to form as well as where and how many.

And while it’s likely not on the forefront of many clients’ minds, Simms notes that establishing an exit strategy is also a part of good business planning. “It’s a discussion I have with clients earlier rather than later because, eventually, there will be consolidation in the market.”

A good legal counsel will serve, essentially, as your general counsel. They’ll handle the bulk of a business’ needs, and partner with outside experts when a situation calls for it. “I’m quarterbacking whatever it is they’re working on,” Simms says. “Oftentimes that means figuring out the problem and the best additional counsel to bring in. Sometimes that’s intellectual property, sometimes real estate, sometimes securities or mergers-and-acquisitions.”

How Long Will It Take and How Much Will It Cost?

These are likely two of the biggest questions any entrepreneur will have and, not surprisingly, they’re related.

“The local component can take the longest,” Simms says. “If you’re not buying an existing business and you’re starting from scratch, it’s not unheard of to take a year; the fastest I’ve seen is six or seven months. So imagine you rent or own a space, you have a time when you can’t actually operate. Do you have enough capital to survive during that time?”

Having access to sufficient funds is crucial, and Simms has a number in mind. “I don’t know how accurate it is, but it’s good for a gut check and I try to tell them from the very beginning. I always say, ‘If you don’t have access to $250,000 to get you through the first year, you’re not going to make it.’ I think that number is pretty low, but I hedge it by saying it doesn’t include the real estate, initial inventory, and buildout costs.”

Back when the barrier to entry was low, someone could go into Simms’ office with $15,000 and get rolling. But those days are gone. And while you may bristle at the idea of a legal retainer, Simms says that’s just the beginning. “I’ll tell you who else will ask for a $10,000 retainer: your land use consultant. And your landlord is going to charge two times the market rate for rent, at least, and want a security deposit that is double or triple.”

It’s the nature of a risky enterprise. “It’s like the wedding industry. The second someone hears ‘marijuana,’ you’re going to get charged more. Legal is just one of the costs you’ll incur, but a good attorney will figure out how to be most useful to your team and save you trouble in the long run. You will probably make mistakes and cost yourself more time and money if you don’t work with an attorney,” she says.

It’s not unheard of, however, for Simms to work with clients who can save themselves some of the legal costs by doing some work themselves. “There are some people who are able to do some heavy lifting. It all depends on your background. Legacy operators, who have been in the industry for years, need help on the compliance side because it’s a radical shift in the way they do things. Whereas folks from the traditional sector who have started three or four businesses before and have a solid understanding of, say, real estate, they might be able to enter and do a bit of work on their own. They may not need me to draft a lease from scratch, and I can come in at the end to ensure it’s compliant.”

And this is just the beginning. Once a business is up and running, there are myriad other legal hurdles to jump; all the more reason to partner with a good attorney.

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