Business partnerships often are compared to marriages – for good reason. Both begin in heady, if not heartfelt, optimism. Both take a lot of hard work to succeed. And both, unfortunately, face steep odds for long-term success. 

In fact, while as many as 50% of marriages will end in divorce, some 70% of business partnerships similarly will fail.

It’s the same in the cannabis industry as all others. In fact, just recently, celebrity cannabis business owner Whoopi Goldberg shut down her women-focused cannabis company, Whoopi & Maya, for that very reason. 

The company closure came after “The View” TV co-host reportedly developed problems with her business partner, Maya Elisabeth – co-founder of infused edibles company Om Edibles. As one Whoopi & Maya board member said in a recent news account, “It became clear … that Whoopi and Maya wanted a divorce.”

In the same week that Goldberg was breaking up her partnership with a company co-founder, another much-larger cannabis company was doing the same thing 1,700 miles from Hollywood as Edmonton-based Aurora Cannabis forced out its co-founder, Terry Booth. His ouster was, in many ways, like that of another cannabis-industry entrepreneur who found himself with a similar fate only months before: Canopy Growth’s Bruce Linton.

Both Booth and Linton were co-founders of two of the most well-known companies in today’s legal-cannabis space, yet neither could withstand the market forces and profit expectations common to all industry leaders.  

Their stories, and those of every other business partnership failing, illustrate how precarious life in the C-suite can be, especially for those startup entrepreneurs who find themselves eventually forced out in soured partnerships, hostile takeovers or even post-M&A firings from the companies they created. 

Bruce Linton, Canopy Growth

The emergent cannabis market provides plenty of news fodder these days as the industry skyrockets to a multi-billion dollar operation worldwide. But merger news doesn’t always end with the two parties riding off in the sunset. Consider entrepreneur Bruce Linton’s spectacular fall at Canopy Growth Corp. last year. 

Canopy Growth is an industry leader for many reasons, including its attraction of capital backing by a Fortune 500 beer and wine company, an anomaly in the business even today. Linton, who founded Canopy (then Tweed) in 2015, was forced out of the company he created in July 2019. The move came after Constellation Brands — a 40% stakeholder in Canopy — voiced displeasure over the company’s worse-than expected financials. That expectation was based, no doubt, on Constellation’s experience with its other products. The New York-based company is the largest beer import company in the U.S., measured in sales. Its portfolio includes Corona, Modelo and even Robert Mondavi wines, among many more spirits brands.

Regardless of expectations and reality, Canopy’s $335.5 million net loss to shareholders in 2018’s fourth quarter probably could be attributed to many legitimate and not wholly unexpected reasons. Still, it was enough of a shock to send beer-and-wine company Constellation into emergency mode and Linton into exile from both Canopy and its VC side, Canopy Rivers. (Though his departure left him with 18 million shares of Canopy in his pockets). 

Terry Booth, Aurora Cannabis

Linton’s departure from Canopy last year was a wake-up call in the industry. But it wasn’t the last. Early this month, Canadian cannabis company Aurora cut 500 jobs, mostly in management, and fired its CEO and company co-founder, Terry Booth. The move came as profits remain elusive in Canada’s recreational cannabis market, one buffeted by illicit markets, retail availability problems, oversupply and slower-than-expected growth in overseas markets, where Aurora has invested heavily. 

Aurora and other large cannabis firms have been suffering since last summer and have seen their valuations plummet because of Canada’s legal market problems. Aurora, itself, was facing the reality that it needed to practically quadruple its quarterly sales to remain viable. As a result, it made the cuts and let go of Booth.

It was a corporate move that most likely will be repeated in similar form in the days ahead as cannabis companies face the stark reality that the green rush is dead and costs need to be reined in.

Partnership agreements offer protection

It would be speculation to say Linton and Booth failed to achieve earnouts tied to revenue targets or specific EBITDA benchmarks. But that is a common reality many company founders face after M&A investment money rolls in and the founders stay on. And if these clauses aren’t structured soundly in the beginning, the founders can find themselves struggling early and facing greater risk of being forced out. Many of them are. 

In this industry and any other, it might not seem like a realistic consideration during the heady days of the company’s takeover. However, downturns are real risks for any company at any point of its life cycle. Ironclad earnout agreements protect the new company, of course. But if structured correctly in the beginning, they can also better protect the company’s founders from the ebb and flow of financial fortunes, too.

Earnouts also can be particularly problematic for a seller because they either have to stay on and work for the acquiring company through the earnout phase, or their payments are tied to the new company’s ability to succeed. Incidentally, this also can disincentivize the acquiring company from spending money during the earnout phase.  

Also, when Linton left Canopy, his non-compete clause barred him from working in Canadian markets, helping to explain his emergence as executive chairman of U.S.-based Vireo Health International Inc. in November 2019. It would be difficult to imagine that Aurora’s Booth wasn’t governed by the same kind of clause and for the same reasons affecting Linton.

Non-compete clauses — often called restrictive covenants in the legal community — come in many forms, and they are almost universally applied in the wake of failed partnerships, and especially in regard to company founders who are forced out post-M&A and who then present a competitive challenge in the same market or geographic region. In the cannabis business space, the most common ones are non-compete and non-solicitation clauses. 

Their use isn’t consistently applied – courts in some states love them and others don’t. Regardless, non-competes that are ancillary to the sale of a business generally are more enforceable than a non-compete signed by an employee. This is because, in general, it is assumed that a person selling his or her business has more bargaining power than does an employee who needs a job.

In addition, part of what an acquiring business often is getting is the good will of the company, which frequently extends to the founder. As a result, if the founder is able to start a competing business just down the street, the customers may follow. Of course, this greatly reduces the value to the acquiring company.  

If companies want to use non-competes in agreements, they first should check the state laws on them. And these clauses should be narrowly tailored in both geographic scope and time to protect legitimate business interests. While it may seem advantageous to make a non-compete as broad as possible to offer the most protection, casting an overly wide net may cause the non-compete to be deemed unenforceable.  

Other partnerships, other failures

Earnouts and non-competes are just some of the many measures that need to be considered for partnership agreements. And only thorough legal review can really expose all the risks and obstacles company founders might face as their business creations go through the usual life cycles of profitability and change.

Thinking about these kinds of legal reviews in the early days of a company isn’t always fun or sexy when the partners are working well together in the thrall of bringing a cannabis product to market. And it’s not always seen as practical, either, in the early days of a start-up, when the revenue chase is the only thing that matters.

But the importance of these partnership agreements can’t be overstated, especially when good partnerships so often go bad, whether in Hollywood or in the boardroom offices down on the hemp farm.