Employee Stock Ownership Plans (ESOPs) in the Cannabis Industry: A Deep Dive
Introduction
Employee Stock Ownership Plans (ESOPs) are an emerging trend in the cannabis industry, offering a unique solution to some of the sector’s toughest challenges. An ESOP is a qualified retirement plan that holds company stock on behalf of employees, effectively turning workers into beneficial owners over time.
ESOPs have long been used in traditional industries, with over 14 million U.S. workers participating in more than 6,600 ESOPs nationally. However, only recently have cannabis companies begun to adopt this model. This report explores how ESOPs are being implemented in cannabis, the strategic advantages they provide (from employee retention and succession planning to tax advantages under IRS §280E), key legal and tax considerations, insurance and risk management issues, comparisons with alternative exit strategies, and industry adoption trends. Short case examples and data points illustrate these concepts.
Examples of ESOP Implementation in Cannabis Companies
While still uncommon, a few pioneering cannabis companies have implemented ESOPs in recent years.
Theory Wellness (Massachusetts)
In late 2023, Theory Wellness became the first large cannabis business to transition to 100% employee ownership via an ESOP. With over 200 employees across multiple states, Theory is now the largest employee-owned cannabis company in the U.S. Co-founders Brandon Pollack (CEO) and Nick Friedman (CSO) sold 100% of the company’s stock to an ESOP trust, stating, “Now we have the opportunity to honor [our team’s] dedication by handing 100 percent of the company over to them.” The transition was structured to not disrupt day-to-day operations, keeping existing management in place but giving employees beneficial ownership over time. Importantly, Theory’s ESOP structure is expected to save the company millions of dollars annually by bypassing the onerous IRS §280E tax rule, effectively making the company tax-exempt at the federal and state level. This tax benefit, alongside the enhanced ownership culture, made Theory an early case study for cannabis ESOPs.
The Honeybee Collective (Colorado)
A smaller example is The Honeybee Collective, a Colorado-based startup launched in 2021 as an employee-owned, community-driven cannabis brand. Honeybee’s founders consciously chose an employee ownership model (described as an “employee-owned collective”) to align with their sustainable and equitable business mission. While not a traditional ESOP under ERISA, it demonstrates a trend of cannabis entrepreneurs pursuing broad employee ownership from the outset. Honeybee even crowdfunded capital to grow its business, avoiding venture investors in favor of grassroots ownership by employees and the community. This highlights the ethos of some cannabis companies to remain independent and “opt out of Wall Street” by embracing employee ownership structures.
Other Emerging ESOPs
Beyond these public examples, several privately held cannabis operators have quietly implemented ESOPs with the help of specialized advisors. The first three ESOPs in the plant-touching cannabis sector were executed in 2023 (one being Theory Wellness) via a novel structure designed to neutralize 280E taxes. Since then, adoption is accelerating. One ESOP investment bank reported it had completed eight cannabis ESOP transactions and expected at least six more in the coming year. These companies span cultivation, retail dispensaries, and multi-state operators, indicating that ESOP feasibility is not limited by company type. As more success stories emerge, such as companies reporting doubled cash flow and happier owners/employees, industry awareness of ESOPs is growing.
Strategic Advantages of ESOPs in the Cannabis Industry
Employee Retention and Motivation
ESOPs create a sense of ownership, leading to increased employee engagement, productivity, and retention. Employees who see long-term financial benefits are more likely to remain loyal to the company.
Succession Planning
For cannabis business owners looking to retire or exit, ESOPs provide a viable alternative to selling to private equity or large corporations. This ensures business continuity while rewarding employees for their contributions.
Tax Advantages under IRS §280E
The IRS §280E tax rule prevents cannabis companies from deducting ordinary business expenses, creating significant financial burdens. ESOP-owned companies can avoid many of these tax constraints, resulting in substantial savings.
Risk Management and Insurance Considerations
ESOPs introduce additional fiduciary and compliance responsibilities. Proper insurance coverage, including fiduciary liability insurance, is crucial to mitigate risks associated with employee ownership.
Challenges and Considerations
Legal and Regulatory Hurdles
The cannabis industry remains federally illegal, creating unique legal challenges for ESOP structuring. Compliance with state-specific regulations is necessary. Additionally, securing financing for ESOP transactions can be more difficult due to the regulatory uncertainty surrounding cannabis businesses. Companies must work with knowledgeable advisors to navigate these complexities and ensure legal compliance.
Financial Feasibility
ESOPs require a strong financial foundation and long-term commitment. Companies must assess their ability to fund the transition without jeopardizing financial stability. Setting up and maintaining an ESOP involves costs such as valuation, legal fees, and ongoing administrative expenses. Cannabis businesses must evaluate whether the long-term tax benefits and employee retention advantages outweigh these initial and recurring costs.
Industry Trends and Future Outlook
More cannabis companies are exploring ESOPs as awareness of their benefits grows. Increasing support from ESOP advisors, investment banks, and legal experts is making implementation easier. As regulatory environments evolve, ESOPs could become a mainstream exit and ownership strategy in cannabis.
Conclusion
ESOPs present an innovative ownership and succession strategy for cannabis companies, addressing key challenges while providing significant financial and operational benefits. While still in the early stages of adoption, successful case studies like Theory Wellness and The Honeybee Collective demonstrate the potential of ESOPs in the cannabis space. As more businesses recognize these advantages, ESOPs may become an integral part of the industry’s future.
