When Maryland Governor Wes Moore signed a law on April 22 exempting employee stock ownership plans (ESOPs) from the state’s strict five-year license-hold requirement for cannabis businesses, it opened up a new path for founders. This change not only provides a practical exit strategy but also creates a way to sidestep Section 280E of the Internal Revenue Code, which restricts tax deductions for cannabis businesses.
How ESOPs Work for Cannabis Companies
ESOPs are not a new concept, but their application in the cannabis industry has been gaining traction. For example, Massachusetts-based Theory Wellness launched its ESOP program in 2023, quickly followed by The Vault, another Massachusetts operator. According to Darren Gleeman, managing partner at MBO Ventures, these programs allow founders to sell company shares to a trust that holds the stock for the benefit of employees. This approach can defer capital gains taxes and use company cash flow to repay any associated debt.
Benefits Beyond Tax Savings
While tax savings are a significant benefit due to the approach to 280E, ESOPs offer more than just financial advantages. They can also boost employee engagement and loyalty, as workers gain a financial stake in the company’s success. For instance, Jon Shore, CFO of Theory Wellness, noted that employee ownership encourages a stronger commitment to the business, as each team member has a vested interest in its performance.
Meg Sanders, co-founder of Canna Provisions, shared a similar perspective, explaining that ESOPs foster a sense of shared purpose, where employees pay closer attention to costs and operational efficiencies because it directly impacts their financial future.
Not for Every Cannabis Business
However, ESOPs are not a one-size-fits-all solution. Hannah King, an attorney with the cannabis team at Dentons, pointed out that for an ESOP to work effectively, a company should have at least 25 full-time employees and an annual EBITDA of $2 million to $2.5 million. These financial requirements can be a barrier for smaller operators.
Real-World Results
The Vault’s CEO, Michael Botelho, initially viewed ESOPs with some skepticism but decided to move forward, awarding the first round of shares to employees in August, about eight months after forming the ESOP. The move, he noted, has helped improve employee retention and engagement, as team members feel more invested in the company’s success.
A Practical Exit for Cannabis Founders
For founders looking to exit the industry without relying on private equity or strategic buyers, ESOPs present a compelling alternative. As King noted, these transactions can offer fair market value while allowing owners to maintain some control through mechanisms like buyback warrants.
Rita Ferreira
Rita is a seasoned writer with over five years of experience, having worked with globally renowned platforms, including Forbes and Miister CBD. Her deep knowledge of hemp-related businesses and passion for delivering accurate and concise information distinguish her in the industry. Rita's contributions empower individuals and companies to navigate the complexities of the cannabis world, and her work remains a valuable resource for those seeking a deeper understanding of its potential.
