One of the things that budding cannapreneurs don’t think about when beginning the licensing process is documenting the funding sources, partnerships, and how to allocate future profits.
As we continue our series for cannabis business owners in the licensing process, today’s post is all about funding, and specifically—the documents your finance team will need.
Why Funding Documentation Matters
Some of the cannabis businesses we work with are 100% self-funded, which means it’s just the principals putting up all the capital for the new business. However, because the process is so lengthy, it can be a long time before you start to see any return on investment.
And because banking can be so tricky for cannabis businesses, many turn to alternative funding sources and investors to cover the start-up costs. If your accounting pro doesn’t know how to allocate profits, or determine how much to pay out, it’s impossible to create accurate forecasts or cut checks appropriately.
Creating a Capitalization Table is a Must
Regardless of who is funding your cannabis business and how, make sure to document funding sources, amounts, and how to allocate any profits. This document outlining company ownership is typically called a capitalization table. Whether you have a single investor or multiple partners, it’s important to clearly define which percentage of the company profits belongs to which investor.
If you’re already partway through the process and haven’t created your capitalization table yet, now is the perfect time to do it. Make sure that copies of the agreements are included.
Ready for financial support in your cannabis business? Contact Accounting for Green today to find out how to get started.
To catch the other videos in this series, see the links below.
Conversation #3 Know Your Cannabis Biz Pros
Conversation #4 Choosing a Host Community and Location
Conversation #5 Understanding Forecasts in the Cannabis Economy
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Here’s a transcript of the video
Now we’re going to talk about money in.
So in order to fully complete the licensing process, you are likely either going to be self-investing, meaning that you’ve put money away to start this business, or you have other investment partners, or you’re going to do a capital raise or you’re going to borrow some money.
So there are all those different ways to fund the start of your business. Oftentimes people do multiple different types of investments so they’ll provide some loans with some guaranteed interest payments and that’s the way some folks will want to invest in your business. Some will want an equity piece and the lucky ones come in with enough money to self-fund, which is amazing and takes a lot of forethought.
But you really have to make sure that you understand each type of investment that you have and that you have the documentation for it. So if you’re having equity investments, you need to have a capitalization table that’s updated with each and every investor and you have to have a W9 on hand for each of your investors and you need to track each separate investment from that investor. So that capitalization table is a work in process during the licensing process and needs to be kept up to date.
And why does this documentation matter? Again, you are going to have to submit this documentation as part of your tax reporting requirements.
You’re probably going to have to submit this documentation as part of some of your host community agreements and you will definitely have to submit all of this information as part of your full licensing process. So making sure from the get go that you have all of that documentation. So every signed loan agreement, every investment, each separate investment piece with the amount of money that’s accepted and the amount of equity that’s given for each separate investment piece and each piece of documentation around.