Being a startup company has many advantages in terms of nimbleness, momentum and risk-taking. On the other hand, those are characteristics that can spell financial trouble for cannabis companies, especially when their directors and officers are making big decisions without taking enough time to consider all the risks.
This is why cannabis companies need D&O policies. But there’s a catch — the costs can easily raise eyebrows. After all, cannabis is a high-risk industry from the start — and the more capital raised, the higher the premium is likely to be. But if a company decides to go naked, its decision-makers can be personally liable for crippling sums:
The executives at the once-red hot cannabis startup, MedMen, recently faced a $20 million class-action lawsuit from employees as well as numerous claims from angry investors and unpaid creditors over wrongful actions. At the time of this writing, the co-founders have left the company, all stores have closed, and little now remains of company assets, but the fighting continues.
North of the border, executives of Aphria were sued for securities fraud, overvaluing assets and misleading investors. The company’s CEO and co-founders resigned, but a class action suit continues in an attempt to recover millions of dollars.
Also, shareholders of Cronos Group filed a class action lawsuit in March charging executives with making false and misleading statements and filing to disclose significant transactions. The share price of the stock has plunged, and investors are seeking a multi-million dollar settlement.
So imagine the difficulty a cannabis company faces today recruiting executives if their personal assets are not protected from such litigation. This is a vitally important purchase for a company to make, and it’s one to make on a timely basis as well. The trend for D&O liability pricing shows steady increases— and this past quarter was no exception.