Equity Compensation for Cannabis Employees

Previously we wrote about equity compensation for cannabis employees from the perspective of companies. We have been dealing with more and more companies adding equity to their overall compensation scheme, so now is a good time to revisit it from the employee perspective. For an overview of the types of equity compensation available, see here.

Equity compensation for cannabis employees: potential employment tax issues

Many companies assume that there are federal exemptions for startups that allow them to compensate early-stage cannabis employees solely in equity, but that is not the case. Minimum wage and overtime laws still apply, and the value of stock and stock options is not included in determining whether an employee is receiving at least the minimum wage. This means that the employer is still responsible for remitting the employer’s side FICA/FUTA and state employer taxes. The employer is also an agent for the federal and state government and is responsible for collecting the employee’s side of federal and state employment taxes, including requiring the employee to indicate what level of withholding the employer should be applying to the employee’s wages.

Equity compensation for cannabis employees: determining compensation valuation

Beyond these general wage issues, there is the issue of compensation value, which is different from company valuation. If a cannabis company goes through a formal valuation process and is reasonably worth a million dollars, that does not mean an employee’s one percent stake in that company has a present value of $10,000.

All new companies and an overwhelming majority of cannabis companies are closely held, meaning they are owned in full by a small group of owners. The shares or ownership interest of the company are not openly available in the public market, and they cannot be made available for general sale unless the company registers its ownership interests under federal securities laws. So the present value of the employee’s one-percent stake in a closely held cannabis business is not the same as the same stake would be in a publicly-traded company.

Resale value isn’t the sole measure of the equity compensation held by a cannabis employee. There are also things like distribution rights and redemption rights. The devil is in the details here because everything depends on the company’s governing documents.

There is no general requirement that a limited liability company or corporation distribute profits to its owners. In fact, unless limited by the LLC operating agreement or the bylaws of the corporation, owners and officers can compensate themselves as salaried employees of the company, potentially eliminating any funds that would be available for distribution.

Even in a company where that isn’t the case, officers often want to hold on to cash to use for reinvestment in the business, as opposed to distributions to owners. Though that may be good for increasing the value of the company overall, it does not increase the present value of an ownership stake that cannot be sold.

Many startup cannabis companies either cannot afford or do not want to spend precious startup funds to determine the exact value of the equity compensation for their cannabis employees. This common scenario is not ideal for the company or the employee.

Equity compensation for cannabis employees: potential employee traps

Cannabis employees should be wary of companies that offer equity compensation in lieu of any pay at all. Employees with equity stakes have some legal protections as employees and minority owners, and they can potentially negotiate for greater protections in the company’s governing documents. Many of the rights and protections mirror what any minority owner of a closely held company would benefit from.

If, as described above, there is a worry that the company’s owners will drain cash by paying themselves excessive salaries, it is in the employees’ and other minority shareholders’ interests to require the company mandate no salaries or maximum salaries for owners and proportional distributions otherwise. That means that if the company is making money and the majority owners want to pull cash out of it, minority owners like employees would also get a proportional cash distribution. This negotiation must occur before the employee accepts the compensation arrangement.

Some shares or membership interests have redemption rights, which are limited rights to force the company to repurchase the ownership interests of the company from the owner. If this were an immediate right to cash, it would defeat one of the purposes of equity compensation for the employer (pay less cash and more equity in the early stages while the company is cash-poor). Many companies have structures in place to offer repurchases of some or all of the ownership interests that employees or other minority owners have, often over extended terms that are favorable to the company.

An additional right that employees and other minority owners can negotiate for are so-called tag-along rights. These are rights that ensure that if majority owners sell a portion of the company to a third party, minority shareholders can participate in proportion to their ownership interest.

Equity compensation for cannabis employees: balancing all of the issues

In general, a cannabis employee offered equity compensation should understand the limitations that come with that offer. Marijuana is heavily regulated in states with licensing programs, and resale options for equity ownership are limited by both securities law and by various state regulations on marijuana company ownership. If a company does not intend to or is not able to pay big cash distributions to its owners, employee equity holders need to realize that the value of their stakes may end up being worth nothing, and the timing on that intelligence is going to be unpredictable.

Cannabis employees should treat the offer of equity compensation like they would any business decision. Research the company. Ask for relevant documents to help you with that research. Ask the owners and management team hard questions, and make your decision once you understand all of the potential parameters.

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New Jersey rec day one just got pushed to May: Here’s why

Regulators granted first rec licenses last week, but delayed day one sales fearing demand will overwhelm current legal supply

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If Michigan deschedules cannabis, will other states follow?

Michigan legislator Yousef Rabhi wants to remove cannabis from the state drug schedule. If it's already legal, why does scheduling matter?

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Cannabis Tax Funds Sent to Municipalities and Counties in Michigan

On March 24, the Michigan Department of Treasury announced that $42.2 million in cannabis excise tax funds will be given to various cities, townships and counties in Michigan. These funds were collected during the 2021 fiscal year, with eligible municipalities and counties receiving funds for having retail stores or microbusinesses within its boundaries.

Michigan’s Marijuana Regulatory Agency Executive Director Andrew Brisbo shared that he’s proud to see how the state’s cannabis income is contributing to local communities. “It’s rewarding to see that the agency’s balanced regulatory approach is effectively protecting consumers while still allowing Michigan businesses to grow and thrive,” said Brisbo. “The funding provided directly to local governments—and the thousands of jobs created across the state—show that Michigan is leading the way in the cannabis industry.” Each municipality or county is eligible to “receive more than $56,400 for every licensed retail store and microbusiness located within its jurisdiction.”

The $42.2 million cannabis tax funds were collected from a total of 374 cannabis business licensees across the state, and will be divided between 62 cities, 15 villages, 33 townships and 53 counties. State Treasurer Rachael Eubanks said in a press release that these funds will be given to the chosen municipalities and counties soon. “The Michigan Department of Treasury will distribute these dollars as soon as practical to eligible local units of government,” said Eubanks. “The doubling of this year’s payment amounts will have a larger impact on local government budgets.”

Through the state’s 10% cannabis excise tax, over $111 million was collected in 2021 with a total of $172 million available for allocation. Additionally, $49.3 million was set aside for the School Aid Fund for K-12 education, and $49.3 million went toward the Michigan Transportation Fund.

In 2021, $10 million of the state’s cannabis excise tax funds were sent out to 100 municipalities (38 cities, seven villages, 21 townships and 38 counties). “The team at the Marijuana Regulatory Agency did a tremendous job getting the adult-use licensing program established and operating efficiently,” said Brisbo in 2021. “Infusing over $28,000 per retailer and microbusiness into local government budgets across the state is very impactful and shows how strong and successful the industry is becoming.”

The state is also welcoming its first cannabis consumption lounge in Hazel Park, called Hot Box Social, owned by Trucenta. “We are honored that Michigan has awarded us the state’s first license for a consumption lounge,” said Trucenta Chief Information Officer Nowfal Akash. “Our plan is to first use the space for corporate, social, and special events. Come summer, we’ll start scheduling events so the public can experience Hot Box Social with consumption-friendly activities like social gatherings, educational opportunities, and arts-focused activities.”

In the meantime, the High Times Cannabis Cup People’s Choice Edition has also returned to Michigan. While the competitor submission window has passed, judge kits will be available to the state starting on April 16. “While the majority of America is working from home, or not working at all, we now have the opportunity to test and rank quality cannabis products from a wide range of producers from the comfort of our own home to help crown the best in each state,” said Mark Kazinec, High Times Director of Competitions & Events. “For brands, this is the best way to get your product into the hands of hundreds of new consumers and get real feedback, especially in a time of no live events. For Judges, this is the best job you’ll ever have, and the best way to see which products work best for you.”

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Warrants Issued For Two Teens in Fatal Washington Dispensary Shooting

Warrants are out in Washington for a pair of teenaged boys allegedly involved in an armed robbery of a cannabis dispensary in the state that left an employee dead, as well as a number of other armed robberies in the area.

The Chronicle newspaper reports that Montrell Hatfield, 16, and Marshon Jones, 15, “are wanted in connection with a fatal shooting at a Tacoma marijuana dispensary and at least 10 armed robberies at pot shops in Pierce and King counties.”

On March 19, an employee at World of Weed in Tacoma, later identified as 29-year-old Jordan Brown, was fatally shot in the neck.

The Chronicle, citing court documents, reported that, during the incident, “Hatfield fought with an employee behind the cash register and Jones fatally shot the employee in the neck.”

“After ordering everybody to get on the ground, Hatfield allegedly fired a warning shot into the ceiling and approached the manager and other employees. He handed them garbage bags and ordered them to put all the money inside,” the newspaper reported. “Brown tossed the garbage bag back at Hatfield, put his hands in the air and stepped backward, records say. Hatfield and Brown then began fighting on the ground, according to witnesses and surveillance footage. Jones allegedly broke up the fight by shooting Brown in the neck. As the teens ran for the door, Jones told Hatfield ‘Don’t worry about them,’ records say.”

Prosecutors in Pierce County, Washington “have charged Hatfield with first-degree murder and second-degree unlawful possession of a firearm,” while “Jones has also been charged.” A “third man who acted as their lookout while they robbed the stores at gunpoint has not been identified,” according to The Chronicle.

The newspaper said that prosecutors “expect to file charges against the teens in the future for four marijuana dispensary robberies in Tacoma and one in Pierce County,” and that the teens are also “suspected in five similar robberies in King County.”

On the same day as the fatal robbery, Hatfield and Jones allegedly robbed a dispensary in Seattle, and tried unsuccessfully to rob another in Tacoma.

Armed robberies of cannabis dispensaries have risen at an alarming rate in Washington, which made history when it legalized recreational pot use for adults via a ballot initiative in 2012. Last week, citing data from the in-state trade group the Craft Cannabis Coalition, the Seattle Times reported that “there have been around 67 armed robberies so far in 2022,” up from 34 and 27 in 2021 and 2020 respectively.

The trend has prompted lawmakers and other officials in Washington to sound the alarm over the vulnerability of cannabis establishments, which typically have large amounts of cash on hand. Earlier this month, state treasurer Mike Pellicciotti traveled to Washington, D.C. to urge passage of the Secured and Fair Enforcement Banking (SAFE) Act, which would allow banks to provide financial services to cannabis businesses––something the federal prohibition on pot currently precludes them from doing.

“You rob the places where the cash is,” Pellicciotti said, as quoted by local television station KING5. “These robberies are tragic. But these robberies are also preventable.”

Last month, Republican state Sen. Jim Honeyford introduced a bill that would have added an extra year to the prison sentence of anyone convicted of first or second degree robbery of a cannabis shop, the same penalty that’s reserved for individuals who rob a pharmacy.

“When people would ask the infamous bank robber Willie Sutton why he robbed banks, Sutton simply replied, ‘Because that’s where the money is.’ Well, that’s why people rob marijuana retailers,” Honeyford said at the time. “Due to federal banking rules, these businesses are almost entirely cash-only operations, making them a target for robberies and a magnet for criminals.”

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South Dakota Gov. Vetoes Bill To Scrub Pot Charges From Background Checks

South Dakota Gov. Kristi Noem kept up her anti-cannabis posture last week, vetoing a bill that would have removed old pot-related charges from criminal background checks.

The legislation, one of three bills that the first-term Republican vetoed on Friday, would have automatically removed certain cannabis charges from a defendant’s public record if at least five years had elapsed since the violation and “if all court-ordered conditions on the case have been satisfied and the defendant has not been convicted of any further offenses within those five years.”

In her veto letter, Noem said that the state’s “current laws and criminal procedures already provide sufficient avenues for people who have earned that second chance.”

“I believe in second chances…But those individuals must at least show good cause or a need for such relief, such as suspended imposition of sentence procedures, county youth diversion programs, or executive clemency that can be requested online at no cost,” Noem wrote in the letter.

Noem said that the retroactive nature of the bill “is bad precedent for criminal justice issues where fairness is paramount,” and that, even with the newly enacted medical cannabis law in South Dakota, “there must remain consequences for using illegal drugs at a time when the use and possession of marijuana, even for alleged medical purposes, was illegal.”

The bill passed both chambers of South Dakota’s Republican-dominated legislature, first clearing the state Senate last month by a vote of 19-16 before winning approval in the House of Representatives 38-31.

GOP state Sen. Mike Rohl, the sponsor of the bill, expressed his disappointment with Noem’s veto.

“This bill would have helped 30k+ people and could have had a positive economic impact of nearly $71 Million over just 2 years for the State. #ReeferMadness is alive & well,” Rohl tweeted on Friday.

But Rohl told the Argus Leader that the veto dims the bill’s prospects for this year. To override a governor’s veto, a bill needs the support of two-thirds in each chamber of the legislature.

“I’ll still pitch it, but I might not even be able to get it out of the Senate,” Rohl said. “And that’s disappointing because of the improvement that this would make in people’s lives.”

For Noem, who has shown little appetite for cannabis reform, the veto was hardly a surprise. In 2020, the state’s voters passed a pair of proposals at the ballot to legalize both medical cannabis and recreational pot use for adults.

But only the medical law remains, after Noem mounted a successful legal assault on the adult-use measure.

A pair of law enforcement officials brought a lawsuit on Noem’s behalf, arguing that the recreational pot amendment violated the state’s constitution. In February of last year, a circuit court judge in the state sided with Noem. Months later, on the day before Thanksgiving, the South Dakota Supreme Court upheld that lower court ruling, saying the measure violated the state constitution’s single subject requirement for amendments.

Noem, who vigorously opposed the legalization amendment throughout the 2020 campaign, celebrated the Supreme Court’s ruling. But there are signs that Noem is out of step on the issue with both her fellow Republicans in the state legislature, who put forward a legalization bill in this year’s session, as well as voters, many of whom have voiced their disapproval with her handling of the issue.

Those voters may get a chance to defy the governor in November, with activists currently aiming to get another legalization proposal on this year’s ballot.

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The Struggle for Cannabis Legalization in Bermuda

An interesting legal fight has now broken out in Bermuda as the island grapples with finding the best way forward on cannabis reform. 

As of last week, legislation intended to create the first guidelines for the local industry—the Cannabis Licensing Act, allowing both recreational use and creating a regulated framework for at least the import of cannabis—was reintroduced in the House of Assembly. It passed on Monday, March 28 with a vote of 18-6. Now it goes on to the House of Lords where it will probably be passed next week, because Senators can only veto legislation once.

For a second attempt through Parliament, the bill is not without its controversies, particularly it is under heat for being a “bad bill.” Indeed, the main criticism of the legislation is that not only is it exactly the same as the bill that tanked last year. Beyond that, an advocacy organization, the One Bermuda Alliance claimed the only people it benefits are those who control the importation of cannabis. 

Beyond this the usual criticisms are being levied at the initiative by those who want to kibosh cannabis reform.

In addition, there is another intransigent legal problem. Namely, the passage of any bill legalizing the recreational use of the drug will set up a constitutional clash with the UK. Bermuda is still a British colony and therefore subject to British laws. The only way to avoid this legal problem is for Bermuda to remove cannabis from the list of controlled substances. This has been in force on the island since the early 1970s.

Cannabis Reform in Bermuda

The Supreme Court of Bermuda ruled in favor of medical cannabis reform in November 2016. Cannabis was decriminalized in December 2017. That said, the practical implications—namely, that patients could only import one gram a year—predictably created conditions where patients turned to the black market. This limit was subsequently increased, but patients still had to cover the costs of the application to import their own cannabis. 

The Decriminalization of Cannabis Amendment Act which decriminalized the possession of up to seven grams of cannabis was implemented in December 2017.

Two years later the Bermudian government released a draft bill called the Medicinal Cannabis Bill. This statute was intended to create a Medicinal Cannabis Authority which would oversee the cultivation, importation, export, manufacturing, research, development, and transport of cannabis. Further a register of strains was to be created along with the issuance of ID cards and other regulations necessary for the implementation of a centrally administered cannabis oversight infrastructure. The bill was officially tabled in December 2020 in the Bermudian Parliamentary House. It subsequently passed in this body but then failed in the Senate by a single vote on March 3, 2021.

A Dire Need for Global Cannabis Reform

Bermuda is not the only country trying to figure out how to proceed, and further within the context of international regulations that govern cannabis. This must be accomplished at the UN, which so far has refused to remove cannabis from its Schedule I classification on an international basis.

The fact that this has not happened so far is a matter with geopolitical implications. The last time this came up for a vote, both the US and China refused to move forward on removing the Schedule I designation on a global level and left this up to both regional authorities and individual sovereign nations.

The problem this creates is that this situation is a catch-22. Those who object to legalization still want to quote current UN law to prevent change from moving forward.

This has not stopped legalization efforts from going forward—it has just slowed them down. Currently legalization efforts are underway at a federal level in the US, many countries in Europe, including Germany, and various countries in Africa.

For this reason, despite all the legal complexities, it is unlikely that Bermuda, with a strong tourist industry, will defer the conversation indefinitely, despite all the wrinkles and complexities that remain.

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