CANNABIS VENTURE CAPITAL TERM SHEETS & EQUITY FINANCINGS ATTORNEY CALIFORNIA
A venture capital term sheet is the foundational document of a priced equity financing — the non-binding letter of intent that sets the economic and governance terms of a proposed investment before the definitive financing documents are drafted and executed. In cannabis, term sheet negotiation carries stakes that exceed those of a comparable non-cannabis financing: federal illegality, DCC ownership approval requirements, § 280E tax exposure, and the absence of federal bankruptcy protection for cannabis businesses create risks that must be surfaced, allocated, and managed in the term sheet itself, not left to be addressed after the investor has committed.
The Law Office of Shay Aaron Gilmore advises cannabis companies and their investors on venture capital term sheets, priced equity financing rounds, and the full suite of definitive financing documents — including Stock Purchase Agreements, Investor Rights Agreements, voting agreements, and Right of First Refusal and co-sale agreements. Recognized as one of the Top 20 Cannabis Lawyers in California by the Los Angeles/San Francisco Daily Journal, as a Northern California Super Lawyer and one of the Top 100 Lawyers in Northern California across all practice areas by Super Lawyers® Magazine, and among the Top 200 Global Cannabis Lawyers by the Cannabis Law Journal, Shay Aaron Gilmore brings both venture capital transactional experience and cannabis regulatory depth to every equity financing engagement. Shay serves on the Board of Directors of the International Cannabis Bar Association and as Chair of the California Lawyers Association Cannabis Practitioners Group.
Whether representing a cannabis company seeking its first institutional round or a fund negotiating board representation, information rights, and anti-dilution provisions in a Series A, the Law Office of Shay Aaron Gilmore provides experienced, cannabis-specific venture capital counsel.
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Key Term Sheet Provisions in Cannabis Equity Financings
Valuation and Economic Terms
The pre-money valuation established in a cannabis venture capital term sheet determines the price per share for the investment and the extent to which existing shareholders are diluted by the new round. Cannabis company valuations are frequently complicated by § 280E: because cannabis businesses cannot deduct ordinary business expenses at the federal level, EBITDA comparisons to non-cannabis businesses are misleading, and investors must evaluate cannabis company performance on adjusted metrics that add back § 280E-disallowed expenses. A term sheet that does not address the basis for valuation may leave both parties with materially different expectations when the definitive documents are drafted.
Liquidation preferences — the rights of preferred stockholders to receive a specified return of capital before common stockholders receive anything in an exit event — are among the most economically significant provisions in a cannabis venture term sheet. A 1x non-participating liquidation preference means the preferred investor receives its investment back (but no more) before common stockholders receive anything in an acquisition below a certain threshold. A participating preferred provision entitles the preferred investor to receive its liquidation preference and then participate pro rata in remaining proceeds — which can substantially reduce what founders and early employees receive in a sale.
Board and Governance Rights
Cannabis investors frequently negotiate for board seats or board observation rights as a condition of their investment. In a licensed cannabis business, board composition must be disclosed to the DCC, and any board member who qualifies as an “owner” under DCC regulations must be approved before taking a seat. The Law Office structures board representation terms with DCC disclosure and approval timelines built in, so that an investor’s board rights become effective only after regulatory approval — not upon execution of the Stock Purchase Agreement.
Information rights negotiated in an Investor Rights Agreement typically include the right to receive quarterly unaudited financial statements and annual audited financials, along with inspection rights and management letters. In cannabis, information rights are particularly important because § 280E can create significant divergence between GAAP financials and the economic performance of the business, and investors need sufficient financial information to monitor their investment accurately.
Anti-Dilution Provisions
Anti-dilution provisions protect investors against future financing rounds in which the company issues shares at a price lower than the investor’s purchase price (a “down round”). Broad-based weighted average anti-dilution is the most common formulation and is generally viewed as balanced; full-ratchet anti-dilution, which adjusts the investor’s conversion price to the lower price in the down round regardless of the amount raised, is much more investor-favorable and can be particularly punishing in cannabis where down rounds are common due to market conditions and § 280E-driven financial pressure.
| Term Sheet Provision | Cannabis-Specific Consideration | Hemp-Specific Consideration |
|---|---|---|
| Valuation | § 280E-adjusted EBITDA must be the basis for valuation; GAAP metrics are misleading | Hemp businesses may use GAAP metrics if hemp operations are fully separated from cannabis |
| Liquidation preference | No federal bankruptcy protection means exit dynamics differ; preference structure matters more | Same general principles apply; federal bankruptcy available to pure hemp businesses |
| Board rights | Board members who are DCC "owners" require prior DCC approval before taking seat | No DCC approval required; standard corporate governance procedures apply |
| Anti-dilution | Down rounds common in cannabis; broad-based weighted average preferred | Same terms apply; hemp companies may have better access to capital in down environments |
| Information rights | § 280E creates GAAP/economic divergence; adjusted financial metrics important | Standard information rights sufficient if hemp is separated from cannabis operations |
| DCC change-of-control trigger | Must be addressed expressly as a condition precedent to equity issuance | CDFA notification may be required; less burdensome than DCC approval |
Definitive Financing Documents in Cannabis Venture Rounds
After a term sheet is signed, the parties negotiate and execute the definitive financing documents. In a cannabis venture round structured as a preferred stock financing, the core documents are: the Stock Purchase Agreement (SPA), the Investor Rights Agreement (IRA), the Certificate of Incorporation (as amended to create the preferred stock series), the Right of First Refusal and Co-Sale Agreement, and the Voting Agreement.
The SPA governs the purchase and sale of preferred shares, contains representations and warranties by the company (including representations regarding regulatory compliance, DCC license status, and absence of pending enforcement actions), and sets closing conditions. In cannabis, the SPA must include representations specific to the industry — including representations that the company holds all required DCC and local licenses, that there are no pending DCC enforcement actions, that the company’s § 280E compliance is current, and that all owners have been disclosed to the DCC.
The National Venture Capital Association (NVCA) publishes model form documents for VC financings that are widely used in non-cannabis deals. The Law Office adapts NVCA model documents for cannabis-specific provisions, including DCC ownership disclosure conditions, regulatory compliance representations, and § 280E disclosure provisions.
Representative Matters
The Law Office of Shay Aaron Gilmore has handled the following types of venture capital and equity financing matters:
- Represented a secured investor in a $500,000 secured investment in a cannabis retail development company. Negotiated investor protections appropriate for a multi-location retail development operating within a complex California cannabis regulatory environment.
- Handled buy-side representation in the $500,000 acquisition of a cannabis manufacturing and distribution company in Ukiah, taking over from prior counsel mid-transaction, reconfiguring the deal structure to satisfy DCC regulatory requirements, and obtaining regulatory approval to complete the change of control.
- Served as regulatory counsel for a secured creditor in a controlled creditor takeover of a cannabis cultivation business, advising on DCC license transfer mechanics in the absence of federal bankruptcy protection, working alongside finance counsel from Squire Patton Boggs.
- Represented the majority shareholder in the restructuring of a cannabis retail entity operating in San Francisco, navigating a minority shareholder dispute and positioning the company for a restructured ownership and governance framework.