The law impacts every step of your entrepreneurial journey. But without abundant resources, many foodpreneurs don’t seek the legal help they need to make smart business choices. This can result in lost money, time, or opportunities down the road.
Luckily, we know an expert in food business law! We reached out to lawyer Jeremy Halpern, who is the Co-Lead of the Food & Beverage Group at Nutter Law, a Boston-based firm. Jeremy has seen it all when it comes to food startpups, and his stories can help you set your business up for success by avoiding common pitfalls.
Are there any misconceptions that clients have about what a lawyer can and can’t do for them?
People often think of a business lawyer as a scribe. They go into a process, there’s a counterparty such as a co-packer, employee or investor, they’re going to cut a deal, and then “call the lawyer” to do the documents. That is often the worst way we can be helpful. Once somebody has a business handshake, it’s really hard to do anything to change that deal if we uncover opportunities or risks that haven’t been addressed.
I’ve worked with hundreds of food brands, as well as food technology and food distribution companies, so we see a lot, and there’s value in pattern recognition. I can help educate entrepreneurs about key business issues in a way that will improve deals, but only if we get to discuss such things before they have defining conversations with a counterparty.
If you’re on your 12th co-packing deal, you probably know what you need to know, but if you’re on your first, and you’re negotiating against someone whose business is co-packing, you’re at a massive information asymmetry and negotiating disadvantage. The role of the lawyer is to help you understand things in advance and think about ways that we can improve the deal or manage the risk, and close the gap on that information asymmetry.
I often help clean up cocktail napkin deals where people weren’t well-informed or well counseled. These deals may have seemed reasonable at first blush, but later it’s apparent how catastrophic those deals were for the entrepreneur. Entrepreneurs should view lawyers who have vertical expertise in addition to their legal training as an integral part of the senior management team.
Is there such a thing as a business that’s too small to have a lawyer?
There are businesses that are too small for certain kinds of lawyers. There’s also no one size of entrepreneur! There’s an early stage entrepreneur who is trying to build a family business, and they expect to take no investment capital and to build it slowly with minimal losses. Those companies are slow growth, and they shouldn’t hire expensive lawyers and accountants at the early stages. Until those businesses are doing $1 million or $2 million in revenue, they may never see those kinds of professionals.
Part of the reason is that they’re taking many fewer risks and they’re playing a different game. They’re not building to sell, so they don’t need to think about everything in the context of what investors or acquirers will think. A lot of what we do is help people see around the corners, and understand the consequences of certain decisions when they seek to sell the business or attract investment capital.
On the other hand, if you’re a brand trying to achieve high-velocity growth and you’re trying to build an asset that you’re going to sell for $50 million to $100 million in five to eight years, then not spending money early on to protect that future value is usually a bad decision. The consequence can be that you eliminate your ability to ever realize that future value.
An example is brands that early on go to food scientists or co-packers and, looking for discounted services to save money, they agree that the counterparty owns the intellectual property. You’ve just halted that brand’s ability to raise venture capital financing or be sold. Now, the only way you can sell is to go back to that party with zero leverage to try and negotiate to get back the asset that you thought you owned in the first place. So it’s never too early to bring in legal counsel!
The three things we always say not to sign without having a lawyer look at them are anything related to intellectual property, anything relating to the equity, and anything that relates to long-term exclusivity.
Does an entrepreneur need a different lawyer for all of these questions and services? Is one lawyer enough to cover their needs?
Like any good lawyer answer, the answer is, “it depends”. If you’re talking about high-growth food entrepreneurs, firms like mine do just about everything you’d need. The upshot is smooth coordination and information sharing. The downside, is that often the more capabilities under one law firm roof, the more expensive those services are per hour.
That said, early stage brand entrepreneurs typically should not retain more than a few law firms in an attempt to save on cash. Your time is your most valuable asset. You really don’t want to spend that time identifying, retaining and managing multiple law firms. Rather, you should use your general counsel to quarterback things, even where the work is being handled by another firm. If your general counsel firm doesn’t provide support, you can often efficiently cleave off the intellectual property work and the regulatory work in particular. Our approach is that if it’s something we don’t do, we’ll find the best person with the necessary expertise – it’s all about the needs of the client.
However, it’s important that even a firm performing a single function for a brand understand some of the particulars about the consumer packaged goods business. A law firm that understands your business, not just your problem, is certain to add way more value and to better help you move the business forward.
What are some of the most common legal documents that a first-time entrepreneur should expect to encounter and familiarize themselves with?
Every food business should be inside of a separate legal entity. That’s often one of the mistakes that early entrepreneurs make. They might file a d/b/a and think that’s the same thing, but it isn’t. You don’t really want to expose your personal assets to the hazards of being a food business. Virtually every food business at some point, if successful, will end up in some form of litigation. It’s almost inevitable, so you should ensure you have a separate entity.
Each of the entities comes with different documentation. There’s no reason an entrepreneur should learn the differences between a certificate of incorporation in Delaware and an LLC Operating Agreement in Massachusetts. But there are important concepts in those documents, most particularly when you’re going to have more than one founder. We see an enormous amount of time and dollars expended on people who don’t document their founder deals.
An example would be if two founders start a business and declare themselves to be 50/50 owners. Months later, one of them doesn’t want to do it anymore, but still owns half of the business. Or they now disagree, but don’t know how to resolve it. 50/50 sounded like a fair thing, and it was an easy thing, but it might not have been a very smart thing.
Early founder’s agreements are critical. They have different names, like a stockholder’s agreement or an operating agreement, but they’re all documenting the same concepts: who has to put what into the business, what are they entitled to take out of the business, how are decisions being made, and who has control over what?
You’ve spoken about raising capital from a business and legal perspective – do you have advice for entrepreneurs who are starting to go out for their first raise?
Start with knowing a lot about yourself as an entrepreneur. There’s a book by Noam Wasserman of Harvard Business School called The Founder’s Dilemmas. It was written for technology founders, but the same rules apply.
Is your orientation toward wealth creation or is it toward control? As he describes it, are you trying to be rich? Or are you trying to be king or queen? If you’re oriented toward control, you have a vision for the business and want to be the final decision maker without constraints on how you approach growth. If that’s the case, then don’t raise money from anyone other than friends and family. Raising outside money comes with restrictions, reporting infrastructure, and decision making processes, and you’re not the master of the ship any longer.
The counterpoint is that companies rarely fail for changes in direction or management or dilution of the stockholders. They fail for running out of cash. If you have a business that’s going to take $15 to 20 million in investment capital and you can’t raise it, or you raise it in such small drips that you’re spending all of your time and energy raising money, then you can fail. You then own more of an entity that’s worth less.
Conversely, if you are oriented towards growth, then you may be more willing to accept large investments that come with substantial controls and substantial dilution, but which offers the opportunity to grow much faster and to more effectively compete in a cutthroat marketplace of food and beverage innovation.
What the scope of work of the lawyer in the capital raising process?
Let’s say someone is looking to raise $1million. The first part is game planning about how much and from whom, and facilitating and making introductions where we can. Once you’ve proceeded from the pitch into diligence and people are starting to discuss terms, we help to educate the entrepreneur about what all the terms in the term sheet might look like, so that we’re helping gate their desires and expectations.
You don’t want to negotiate initially by term sheet. You should have already had conversations about what would be covered, which the term sheet then reflects. When we’re working through that term sheet, we’re getting hopefully to a point that’s agreed to by the parties, and then diligence starts.
Diligence is often invasive and disruptive to businesses, who are being asked to produce a ton of documentation around the business for an investor to review. This process can be particularly challenging for folks who have never had investors before! There are receipts stuffed in shoeboxes and contracts on assorted laptops. Brands are sometimes on Quickbooks, but they’re often not on things like NetSuite, so there’s a lot of data that has to be generated. It’s a long process.
Then the documentation starts. Depending upon the kind of investment deal, that documentation can be thin and light, particularly with something like a friends and family convertible note round. On the other hand, a priced equity round from a venture investor requires substantial documentation. There’s a tremendous amount of paper being generated, and much of it has detailed information about what this company is purporting to be, what it’s promising to do, and how the company will behave in the future. That can take two weeks or it can take two months. It depends on the deal and the investor.
At the close of that deal, we’re often working with the investors and the entrepreneur as a Board to implement the rapid hiring and scaling of commercial activity contemplated by the investment round.
We also help entrepreneurs adjust to the presence of investors and the new decision making processes. The goal is to keep the communication flowing between stakeholders, so that everyone can be collaborative and focused on driving the business forward.