5 Practical Tips to Prepare for a Successful Venture Capital Financing

By Robb Baird & Sophia Mapara

If you’ve decided venture capital is the right route to grow your business, here are five tips to help you prepare to secure the investment.

1. ENSURE YOUR RECORDS ARE UP-TO-DATE

Present your company and its management in the best light to prospective investors. Ensure that:

» Your minute book is in order. A virtual minute book isn’t mandatory, but it’s helpful because it can be viewed from anywhere.

» You’ve made all annual corporate and tax filings, and haven’t, for example, overlooked filing an annual return.

» The company is in good standing with applicable regulators.

» All shareholder records and capitalization tables accurately reflect the company’s current position.

» The list of directors and officers is current.

» Any material corporate actions (typically, those requiring board or shareholder approval) have been recorded through resolutions of the directors and shareholders, as applicable.

» If the company has a stock option plan, it has properly recorded and granted stock options. Stock option grants should be accompanied by a stock option plan, director resolutions approving the grants, signed option agreements and noted in any capitalization table or option register.

2. PREPARE YOUR DATA ROOM

Prepare for the due diligence process by having all the information investors will ask for at your fingertips. This makes your company and its management look organized, efficient and professional, and saves time and money during the due-diligence process. An effective way to do this is to set up a data room (or have your legal counsel do so) housing all your company’s pertinent information, including:

» A list of all issued and outstanding shares, options, convertible securities, warrants or share purchase rights, and details about any ownership or control (directly or indirectly) over any other corporation, partnership, trust, joint venture, limited liability company, association or other business entity.

» All consents, approvals, orders or authorizations, and any registrations and qualifications, required by any federal or provincial governmental authority for the company to enter into the investment agreement.

» Your intellectual property (IP) could be very attractive to potential investors, so have your IP house in order. Prepare a list of all owned and licensed IP, domain names and registration details, and whether there are any pending or threatened actions, proceedings, contract defaults or infringements, respecting such IP. Include the company’s standard form of IP licence to third parties, and a list of all employees that had access to confidential or proprietary information who haven’t signed an Employee IP Agreement. Investors will also want to know whether there’s any open source software (OSS) creating obligations for the company to disclose its owned IP in source code form, license it to make derivative works, or redistribute it at no charge.

» Whether the company is violating any instruments (for example, articles of Incorporation, bylaws, judgments, notes, mortgages, leases, material agreements, contracts or purchase orders, or regulations), and whether entering into the investment agreement will put the company in conflict with any existing agreements or create any liens on any of its assets.

» A list of any company obligations in excess of an amount material to its operations, any licenses, patents or rights the company has granted that might limit its exclusive right to develop, market or sell its products, and any indemnifications the company has granted.

» Details of any dividend payments or distributions, indebtedness for money borrowed or incurred liabilities (other than in the ordinary course of business), loans or advances the company has made to any individual or entity, assets or rights the company sold or disposed of, and whether the company is a guarantor or indemnitor of any indebtedness of any individual or entity.

» Whether the company has, in the past 12 months, engaged in any discussions with any person about the sale or exclusive license of substantially all the company’s assets.

» Lists of any agreements, proposals or understandings between the company and any of its officers, directors, consultants, key employees or affiliates.

» Lists of the company’s property and assets, including details of any mortgages, loans, encumbrances and leases.

» The company’s recent financial statements, including its balance sheet, income statement and statement of cash flows, any material liabilities or obligations not set out in the financial statements, any changes in the company’s assets, liabilities, financial condition and operating results from what’s set out in its financial statements.

» A list of all full-time and part-time employees and any consultants and independent contractors the company has engaged. Prepare a list of any employee conflicts, such as employees who might be obligated under a commitment or other agreement, or subject to a judgment, that could conflict with the company’s business. Compile details about whether the company owes money or is in arrears of payments to its employees or contractors, and details about any key employees who might not continue their service with the company, and details about any terminated employees and their severance packages. Investors will also want to know details about employee benefit plans, labour unions, tax returns and payments,

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Prepare for the due diligence process by having all the information investors will ask for at supportive they will be to a financing so it doesn’t surprise them and interrupt the process later on.

4. NEGOTIATE THE TERM SHEET

If you’ve been presented with a Term Sheet setting out the basic terms and conditions of a proposed investment, consult with legal counsel experienced in VC financings. They can walk you through what terms typically are, and are not, negotiable, and advise whether the proposal is up to par with current market practice. It might entail some expense up front but you’ll benefit from having someone navigate the deal with you.

5. BE FLEXIBLE & REALISTIC insurance plans, confidentiality and nonsolicitation agreements, and so on.

» Lists of all permits and licenses the company might need, its corporate documents, whether the company complies with applicable environmental, safety and privacy laws.

3. IDENTIFY GAPS, RISKS & REQUIRED CONSENTS

You might be required to obtain another’s consent before entering into an investment agreement. Common examples are Shareholders’ Agreements, previous government grants or loans and by-laws. Other agreements might require you to disclose the nature of the investment agreement, or limit what you can do with your assets. For example, open-source software (OSS) will be covered by a licence, not all of which is commercially reasonable; if not careful, you might be required to provide any modifications to the OSS back to the licensor. It’s also helpful to proactively check in with existing shareholders to get a feel for how

Familiarize yourself and be prepared for the changes to the company, its structure and shareholder rights that are about to happen. Investors will likely want some degree of control over major company decisions, board representation, and will likely require certain investor protections such as anti-dilution rights and rights of first refusal. Existing shareholders might be required to enter into an amended and restated shareholders agreement. The company and certain existing shareholders might be required to enter into an Investors’ Rights Agreement, a Voting Agreement, or other agreements.

Be realistic and flexible based on the market conditions at the time, and the amount of energy you’ll put into finalizing the investment deal. It’s a good idea to start the process at least seven to eight months before you plan to raise funds, ensuring you have enough runway capital to get you past the finish line, and enough time to devote to the investor curation and due diligence process, while simultaneously running your business.

Robb Baird & Sophia Mapara are Startup and Corporate Finance & Securities Lawyers at McInnes Cooper.

This article is information only; it is not legal advice. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2022. All rights reserved.

Ontario Quebec

The Ontario Cannabis Store (OCS) announced in mid-February its plans to transition to a fixed mark-up pricing model, along with reductions in its margins, to help enable a vibrant cannabis marketplace. With this change, it is estimated that OCS margin reductions will contribute approximately $35 million into the marketplace in 2023-24, with a full fiscal year reduction in 2024-25 estimated at approximately $60 million and compounding annually in years thereafter as the market grows. Pricing changes will be implemented for September 2023, allowing adequate time for OCS to work with licensed producers to consider changes to existing products and products scheduled to launch in upcoming 2023 releases.

Manitoba

DELTA 9 CANNABIS INC. has completed the installation and implementation of its new fully-automated pre-roll manufacturing equipment at its Winnipeg, Manitoba facilities. The initiative was funded in partnership with the Canadian Agricultural Partnership AG Action Manitoba program, through a Contribution Agreement for $175,000, or 25% of the overall project cost.

Fire & Flower Holdings Corp., a leading cannabis consumer retail and technology platform announced the opening of its new cannabis retail store in downtown Winnipeg, Manitoba bringing its local stores to five in Winnipeg and eight in Manitoba as of mid-march.

According to Statistics Canada, Manitoba’s recreational cannabis sales grew to $18.3 million, leading the country with an increase of +21.7% from November to December.

During its third quarter, the Société québécoise du cannabis (SQDC) recorded overall net income of $32.2 million. Added to this is tax revenue related to its operation in the form of consumption tax and excise tax estimated at $54.4 million, including $38.4 million to the Quebec government. A total of $86.6 million is therefore earmarked for governments, including $70.6 million for the Quebec state.

Saskatchewan

MADD Canada has partnered with the Saskatchewan Government Insurance (SGI) and the Saskatchewan Liquor and Gaming Authority (SLGA) to launch a new video education program aimed at preventing impaired driving among the youth. The program, which is set to be delivered to middle and high school students across the province, includes a fictional story titled “Final Play” that recounts the experience of four friends who decide to drink and smoke cannabis before driving to a party.

According to Statistics Canada, Saskatchewan recreational cannabis sales grew to $17 million, an increase of +10% from November to December

Alberta British Columbia

A recent new report from Statistics Canada has revealed that Albertans almost lead the country when it comes to sales of recreational cannabis. Yukon had the highest per-person cannabis sales ($291), followed by Alberta ($210) and Saskatchewan ($185), while Quebec had the lowest ($89), followed by Manitoba ($107) and Nova Scotia ($125).

According to a recent Calgary Herald article last year alone, 68 cannabis retailers cancelled or didn’t renew their licenses compared with just 19 stores in 2021 as of Feburary 2023.

According to Statistics, Canada British Columbia recreational cannabis sales grew to $63.1 million, an increase of 13.3% from November to December.

According to the 2022 Annual Report released by the PEI Cannabis Management Corporation, total net sales revenues were $21.89 million, a 14.5% increase over last year. Of those sales 62% ($13.57 million) were dried flower, 22% pre-rolls ($4.81 million), 5% extracts ($1.1 million), 4% ($0.875 million) edibles 1% ($0.21 million) beverages, and 5% ($1.1 million) concentrates across its four stores and online. Similarly 650 different SKUs were sold with a customer count of 544,976 visits.

Nova Scotia

In mid-February, the NSLC released its third-quarter financial results (October 3, 2022 – January 1, 2023). Total sales for the quarter were up 6.1% to $228.1 million, with a 9.2% increase in cannabis sales to $27.6 million. The NSLC continued to improve access to cannabis with the opening of a new cannabis store in Inverness for a total of 46 cannabis stores across the province. It also reduced the average price per gram a further 1.1% to $6.30 compared with the same time last year as it works to impact illicit sales in the province.

Prince Edward Island Newfoundland & Labrador New Brunswick

In early March, the Newfoundland and Labrador Liquor Corp. (NLC) reported cannabis sales through licensed cannabis retailers totalled $18.6 million in the third quarter, an increase of 31.9% over the same period the previous year. Total retail cannabis sales in the third quarter, including online sales, were $18.7 million. Following a three-year review of the cannabis industry recently completed by the Government of Newfoundland and Labrador, in consultation with NLC, the decision was made last September to approve cannabis vapourizers (commonly referred to as “vapes”) and associated products. The first cannabis vapour products hit shelves in October, and cannabis vape products’ sales were $1.6 million in the third quarter, amounting to 9% of total cannabis sales.

Yukon / Northwest Territories / Nunavut

In early February, Cannabis NB released its unaudited results for the third quarter ended January 1, 2023. Total product sales for the quarter were $21.6 million, an increase of 5.0% compared to the same period last year. Net income for the quarter was $4.8 million, 21.5 per cent above prior year’s third quarter net income of $3.9 million., Key product sales trends for the third quarter (October 3rd, 2022 to January 1st, 2023) compared with the third quarter last year were: sales of dried flower decreased 8.0%, down $0.9 million, extracts sales decreased 10.6%, down $0.1 million, sales of accessories increased 11.2%, up $0.1 million, sales of edibles increased 24.8%, up $0.4 million, sales of topicals increased 21.0%, up $26,100 and, concentrates sales increased 30.3%, up $1.6 million

In late March, the Government of Canada awarded funds to help address harms related to substance use in the Northwest Territories and Yukon. These included the Yellowknife, NWT $2,162,051 over 15 months to provide care to street-involved individuals and improve access to supports for vulnerable individuals with substance use disorders, by providing prevention, harm reduction, and treatment services, as well as the Selkirk First Nation Traditional Healing Program, which was awarded $1,749,111 over 26 months to address the serious issues of addiction and mental health challenges resulting from intergenerational Indian Residential School trauma in the remote and isolated Selkirk First Nation Traditional Territory, Yukon. / Yukon sales were $966,000 (an increase +13.4%), Statistics Canada did not present sales figures for the Northwest Territories and Nunavut.

Atlas Global Brands Inc., a cannabis company with expertise across the cannabis value chain, announced Bernie Yeung as CEO. Bernie is an accomplished sales and market executive, with almost 20 years of experience in cannabis, alcohol and consumer packaged goods industries. Bernie has held senior executive roles in cannabis, including leadership positions with multiple publicly traded licensed producers. Bernie is the former Senior Vice President, Sales & Marketing for Aphria and the newly merged Tilray. Previously, Bernie was the head of marketing for Brown Forman (parent company of Jack Daniel’s).

Corné Melissen is the Interim CEO of Phoena. In March 2021, Corné founded Kenzoll, a Netherlands-based investment firm. Kenzoll in 2022 acquired a 90% equity interest in Phoena Holdings. Corné has been in the private equity industry since 1991 when he started working for Dutch private-equity firm Alpinvest. In parallel to his business career, he served as a reserve-officer in the Netherlands Army. He was mobilized as active-duty officer in various domestic and overseas deployments. Since 2006, until 2021 he was a partner at Dutch private equity firm Ramphastos Investments. In 2021, Kenzoll carved out part of the Ramphastos portfolio (mostly energy and technology assets) in a buy-out.

Atlas Global Brands Inc., a cannabis company with expertise across the cannabis value chain, announced Jason Cervi as CFO. Jason has more than 20 years of experience working in large global publicly traded organizations with market capitalizations in excess of US$10 billion, across several highly regulated industries including health care, medical devices, aerospace and defense. Jason has deep technical and operational knowledge and expertise in M&A and business integrations. Jason is a Chartered Professional Account and holds a Bachelor of Commerce degree with a minor in Economics from DeGroote school of business at McMaster University.

Haventree Bank announced the appointment of accomplished executive Fern Glowinsky as President and CEO. Since 2018, Fern has been the President and CEO of Merrco Payments, which she built into the market-leading payments company in the cannabis sector. Prior to that, Fern led companies in the non-prime lending sector, and spent 15 years as a senior executive at Moneris, a joint venture of RBC and BMO. Throughout her career, Fern has demonstrated the ability to unite teams around a common vision, lead successful digital transformations and develop strong and lasting partnerships. Fern holds an MBA/JD degree from Schulich and Osgoode, has a BA in Economics from Western and is a graduate of Directors Education Program.