Massachusetts-based Theory Wellness is becoming the largest employee-owned cannabis company and the timing with the holidays is a bonus.
In addition to bringing the employees on as owners the company has also uncovered a legal way to avoid the onerous 280E tax provision, a move that will save the company and its workers “millions” a year, according to one of the business’s founders.
Co-founder and Chief Strategy Officer Nick Friedman told Green Market Report that the business on Wednesday closed a transition into an employee stock ownership plan (ESOP), which will make it exempt from both state and federal taxes.
An ESOP is a government program that Friedman said is structured similarly to 401k retirement plans.
“It essentially is a much more robust retirement plan for employees,” he said. “Over time, your employees vest into ownership based on tenure. It’s done in a democratic way, in the sense that simply your ownership is based on your payroll. It avoids executives getting paid at multiples from your entry-level worker; everyone is getting an ownership stake in the company.”
The structure, Friedman said, creates more incentive for employees to perform better and stick with the company longer. And, he said, it’s an “alignment of values” between management and staff.
One of the ancillary benefits to such a transition is the company becomes completely tax-exempt at both the state and federal levels, Friedman said, which means Theory could become the first legal marijuana company to legally evade 280E, the federal tax provision that excludes companies dealing in Schedule I substances from claiming standard business deductions.
“Any ESOP company is a tax-free organization. So it no longer pays state or federal tax,” Friedman said, adding that Theory has had a “team of professionals” working on the transition deal, including tax attorneys.
“It’s designed that way so that the employees, who are now the owners, are getting more value over time. In a certain way, in cannabis, that does have a magnified impact of 280E’s tax impact.”
Friedman said Theory decided to push for an ESOP in early 2023, months before the Biden rescheduling news broke, and added that the company would have made the same push anyway even if tax exemption wasn’t a benefit.
The situation is a “win-win” for the company’s current owners as well as for its employees, Friedman said. He also said to the best of his knowledge, Theory is the first company to implement an ESOP structure in the cannabis industry, and that day-to-day operations – including current company leadership – will remain the same.
“It’s a transaction that still provides liquidity for shareholders, but it simultaneously provides a great platform for employees to be giving more benefit to the company over time,” Friedman said. “We hope this leads to overall improved morale, retention and performance. … We generally just believe that a company that treats its employees really well is going to perform better than a company that doesn’t.”
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