#243 - Building Your Team Legal Considerations with Giannuzzi Lewendon

In this episode of the Startup CPG Podcast, host Daniel Scharff sits down with Blake Horn and Ryan Hall, both partners at CPG-exclusive law firm Giannuzzi Lewendon, to dig into one of the most overlooked parts of building a brand: doing it legally right from day one. From horror stories at the closing table to the nuances of vesting schedules and co-founder agreements, Blake and Ryan share hard-won lessons and cautionary tales that every founder — at any stage — needs to hear.

Blake opens with a jaw-dropping story of a founder at a multi-hundred-million-dollar exit who got a call from someone they hadn't thought about in 20 years claiming to own half the company — based on a napkin agreement. Ryan follows with a tale of informal equity promises that produced costly litigation and wiped out a significant chunk of sale proceeds. Both stories drive home the same lesson: the problems you ignore early on don't disappear — they compound.

The conversation covers the most common early-stage mistakes: misclassifying employees as independent contractors, failing to put basic offer letters and IP agreements in place, and making informal equity promises without documentation. Blake and Ryan explain why these issues are the number one thing that surfaces in investor and acquirer diligence — and why cleaning them up gets exponentially harder the longer you wait.

They also get into the nuances that make CPG uniquely complex: hourly vs. salaried employees, field reps vs. office staff, co-manufacturer relationships, and why co-founder vesting looks very different in CPG than in tech. Blake and Ryan walk through how to structure equity grants using performance-based and time-based vesting schedules, what acceleration clauses mean at exit, and what to say — and not say — when you have to let someone go.

Whether you're hiring your first employee, bringing on a co-founder, or getting ready to raise a round, this episode is the legal foundation you didn't know you needed.

Listen in as they discuss:

• Why informal equity promises and napkin agreements can resurface at the worst possible moment — decades later
• The real risks of misclassifying employees as independent contractors, and why it's the #1 thing acquirers look for in diligence
• The essential documents every early-stage brand should have in place: offer letters, IP/NDA agreements, equity plans, and employee handbooks
• Why CPG companies face unique employment complexity — hourly vs. salaried, field reps, contract manufacturers, and more
• How vesting schedules work — and when to use performance-based vs. time-based structures
• The co-founder vesting conversation: why it's different in CPG, and why you still need to have it
• What to do (and what not to do) when you have to terminate an employee — and why a separation agreement is a powerful cleanup tool
• How to audit your employment practices before a fundraise or acquisition so you're not scrambling at the last minute
• Why using AI or generic templates for employment documents is a false economy — and what it actually costs to fix them later
  
  

Episode Links:

Blake Horn – Partner, Giannuzzi Lewendon
LinkedIn: https://www.linkedin.com/in/blake-horn-45034020/

Ryan Hall – Partner, Giannuzzi Lewendon
LinkedIn: https://www.linkedin.com/in/ryan-hall-3517344/

Giannuzzi Lewendon
Company LinkedIn: https://www.linkedin.com/company/giannuzzi-lewendon-llp/
Website: https://gllaw.us/ or email either of them at [e-mail] and [e-mail].

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Show Links:

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• Questions or comments about the episode? Email Daniel at [e-mail]
• Episode music by Super Fantastics
  
  

If you’re interested in learning more about the science behind Cognizin,
Head to www.cognizin.com to learn more.

Creators and Guests

Host

Daniel Scharff

Founder/CEO, Startup CPG

What is The Startup CPG Podcast?

The top CPG podcast in the world, highlighting stories from founders, buyer spotlights, highly practical industry insights - all to give you a better chance at success.

Blake Horn
We know where the bodies are buried, we know where the hiccups happen. And everything we do is focused on the long term vision. How do you get your company from where it is today to where you plan for it to be tomorrow? And what can we do to plug in and make sure that happens? And I think the focus on the industry just means we have that deep experience and knowledge that is going to be directly applicable to whatever you're working on over the course of the lifespan of your company.

00:43
Daniel Scharff
Hello again, everybody. As a founder, building your team is one of the most special things that you get to do. You're finding great people, they're aligned to your mission. You're going to bring them on with their excellent skill sets to help your company grow in. It feels amazing, but it's also one of the most important things to do the right way. And it's often overlooked. So today we've got the experts. Ryan Hall and Blake Horn, both partners at top tier CPG law firm Giannuzzi Lewendon. They're going to share tons of learnings, cautionary tales and really useful tips for emerging brands. You are going to find this extremely useful.

01:16
Daniel Scharff
If you want to chat with them, which I highly suggest because they are very helpful people, you can visit GL Law Us or email either of them at Blake L Law Us or R Paulaw Us both in the show notes. All right, let's start the show. All right, welcome everyone. I am very excited that we have the pros from Giannuzzi Lewendon here today. We're talking about building your team. So. So first of all, let's just do a little round of intros. Blake, I'm going to start with you. Who are you guys? What makes you the right people to be helping us out today?

01:54
Blake Horn
Well, thank you so much for having us, Daniel. We've been very excited about this podcast and I am one of the partners at Giannuzzi Lewendon. We are a law firm exclusively dedicated to working with CPG brands and their founders across the better for you. Food, beverage, beauty, pet and other consumer products landscape. Every lawyer here is dedicated to just helping you succeed and win in the CPG industry.

02:22
Daniel Scharff
All right, Ryan, coming to you.

02:23
Ryan Hall
Hey, yeah, thanks for having us. Happy to be on again. I'm also a partner here at Giannuzzi Lewendon. I've been working for over a decade now and doing exclusively like said, just representing CPG companies really from Formation, exit and everything in between. Obviously, in order to build a business, you got to hire a lot of employees, you got to Build a team. So we're excited to talk a little bit more about some of those aspects.

02:47
Daniel Scharff
All right. Probably it's obvious to most people, but what are the main benefits of working with a firm that all they do is CPG all day? This is what they eat, live and breathe. They're at all of our trade shows. They know everybody. I mean, what else do you tell people? Like, definitely think about that when you're actually taking a law firm to go with.

03:06
Blake Horn
Yeah, yeah, look, I think what we do is an inch wide and a mile deep. So we are so focused on this industry, the types of issues that these types of founders deal with, these types of brands need to deal with. So we have years and years, I mean, multiple decades of experience in the industry. We know where the bodies are buried, we know where the hiccups happen. And everything we do is focused on the long term vision. How do you get your company from where it is today to where you plan for it to be tomorrow? And what can we do to plug in and make sure that happens?

03:45
Blake Horn
And I think the focus on the industry just means we have that deep experience and knowledge that is going to be directly applicable to whatever you're working on over the course of the lifespan of your company.

03:57
Daniel Scharff
I like that. Also, everybody who loves cpg, I think as much as I do, I feel a strong kinship toward. It just occurs to me when you talk about it that way that probably all of us are going to be in this industry and knowing each other for a very long time. So it is really powerful just to find the people who are all in on it. Okay, so Blake, you talked about knowing where the bodies are buried. You've probably seen some of them get buried also, because you're in on all of these transactions and negotiations. Before we start talking about building a team the right way, let's talk about the wrong way or just some of these horror stories, because I know you have seen this go bad.

04:33
Daniel Scharff
And so I don't want to scare people too much, but let's scare everybody a little bit. So, Blake, maybe can you start me out with a cautionary tale? When have you seen something really go wrong?

04:42
Blake Horn
Yeah. Yeah. Okay. Fun way to start. Look, this is the story I think I bring up to almost every single founder I talk to when we're talking about early stage formation and starting things up. But I remember being at the closing table for a, you know, multi hundred million dollar exit transaction and the founder gets an email or a call from a lawyer that represents somebody they haven't even thought of in 20 years. But this person said, guess what? I own half your company and I know you're selling it. This deal was announced and. And I want what I'm entitled to. And the founder didn't even remember this happening. But it turns out that there was some email or napkin from 20 years back, whatever it was, where this person was told they would be an equal founder in this business.

05:40
Blake Horn
So, look, this ended up being something were able to resolve to some extent with a lot of negotiations, a lot of additional structure on the deal, time, money spent. And I think this is a very good starting place for why people should be thinking about these things early on. Because this actually turned out to be something that could have been dealt with a long time ago and put to bed and never resurfaced in the way it did if there was some planning done earlier on. So the moral of that story is these things can come back to haunt you many years later at the absolute worst possible time.

06:18
Daniel Scharff
That's a good one. Nobody listened to this too close to bed. It might give you some nightmares for like, by the way, what is the environment like in those deal rooms where just something's about to get signed for hundreds of millions of dollars? Is everybody pretty chill and very matter of fact just ticking off through terms and negotiating things, or are people super excited and nervous? What does it feel like?

06:38
Blake Horn
Oh, it's such a mix of emotions, but sleeves are rolled up, hair is falling on people's faces, there's sweat, there's high energy, there's exhaustion, there's everything. But I think the common thread is that there is hopefully a desire on all sides to make a deal happen and make it a deal that both sides are going to be happy with. So it's an exciting place to be. It's a high stress, high energy, high emotion type environment. But we certainly have fun with it.

07:12
Daniel Scharff
All right. I would watch that TV show that sounds pretty good.

07:15
Blake Horn
I think it's called Suits.

07:17
Daniel Scharff
Yeah, that's it. I love that show, actually. Okay, Ryan coming to you. Tell us a scary story.

07:23
Ryan Hall
Yeah, I think that the moral of the story that we're going to be hearing a lot is dealing with things before you get to selling your company. A very similar issue that there was. We basically had an employee that there had been a lot of promises made, talking about bonuses and equity top ups. And a lot of these things were just very informal conversations that we thought that the relationship was good and everything was okay, everyone was aligned. But then all of a sudden, when there's tens of millions of dollars or hundreds of millions of dollars on the table, These prior conversations pop up. And what happened was something popped up, right? Basically, the week before were intending to close, we actually took a little bit of a different attack than Blake mentioned.

08:06
Ryan Hall
Because of the business fundamentals, we needed to close and just go ahead and move forward with that. So we closed without resolving the issue. And what happened was it produced litigation afterwards. And so we had expected that, but it ended up wiping off a significant chunk of the company's valuation and the sale proceeds. And so it was a very expensive mistake. And everyone, these are lessons learned that the founders always tell you afterwards. Now I know what not to do. And for the next business, hopefully our goal is to try to pass on some of that knowledge so that you don't make the mistakes that we've seen in the past like this, right?

08:39
Daniel Scharff
You hear that, everybody? If you listen to this podcast, they personally guarantee that you will not make any of these mistakes. Just kidding. Not a lawyer. Just kidding. Don't listen to me. All right.

08:49
Blake Horn
If you listen closely enough.

08:51
Daniel Scharff
Yeah, right. Take notes. Okay, now we've heard the worst of it. Now let's get into some of the right way to do it, because I am guilty of this as well, of just like building something in the early days and really just not thinking about that too much. Like, I don't even know what this is going to be like. I don't want to spend time on legal side of things and, you know, getting all my ducks in a row and for sure, really just wishing I could go back and do that over. But when companies don't turn out to be anything, then you don't regret that time that you didn't spend. So let's talk about really getting it done the right way.

09:22
Daniel Scharff
So when you are in that situation, you're an early stage founder and you're like, I don't know, like, I'll deal with this later. Why should you actually think about it right then? And why is it only going to get worse the longer you wait?

09:34
Blake Horn
Blake? Yeah, look, I think of this as one of those areas where the problems just compound over time. Not the good kind of compounding, the bad kind of compounding. And what I mean by that is you might make a mistake, an early misstep with one employee. And by the way, that can be a major project to clean up. But if you start doing the same thing over and over, five employees, 20 employees, 50 employees, all of a sudden you have this major problem that needs to be cleaned up. But now you don't have to just clean it up for one person. You need to clean it up for 50 people. And the issues associated with that, whether it's wage and hour issues or tax issues related to equity offers, things like that.

10:22
Blake Horn
This stuff tends to pop up when people are doing deep dives, investors and acquirers. And by then, it's often too late to clean up or extremely complicated and costly to clean up. So the thing with. Whenever you're talking about your team, the people that are helping you build the brand, these are the types of things that get woven into the fabric of how you run your business. So if you're putting things in place early on that aren't done the right way, that tends to follow you for a very long time. And so that's definitely one of the major dangers with not thinking about this stuff from the start.

10:59
Daniel Scharff
And. Okay, very well put. I think everyone listening definitely is paying a lot of attention now. So, Ryan, maybe let's loop you in here. What are some of these mistakes that people might make early on that then could start compounding?

11:13
Ryan Hall
Yeah, so there's a lot of things to get right, of course, but there's a couple of mistakes that really come up repeatedly. We see very commonly, and I'd say the. One of the first ones is around the classification of someone. So you can either classify someone as an employee or a contractor. And so there are rules around that. Right. It's not just say we choose to classify you, it's based upon the actual relationship. And a lot of times it can seem simpler and cheaper to just bring someone on as an independent contractor. You just pay them 1099 and that's it. There's no benefits involved. It's a lot simpler. And so. But there's problems that arise from making that misclassification. Another big thing is around just failing to put in place basic documents. Right.

11:57
Ryan Hall
To Blake's point, if you don't have an offer letter, a standardized offer letter, or NDAs, or IP agreements, you know, if you don't do that for the first employee and then you also don't do that for the 20th employee, all of a sudden you have really compounded your issues, creating a big scale of it. So. And I think the other big problem that we see all the time really, is, unfortunately, is around these kind of informal equity promises. Right. There's agreements to bring on people, and because cash is tight, we're talking about supplementing compensation with equity. And there's real documentation that has to be put in place for that.

12:32
Daniel Scharff
Right.

12:32
Ryan Hall
You need to make it very clear about what people own, what rights they have or rights they don't have. And if you don't have those claims or don't have the documentation in place, that's going to create confusion and potential claims down the road. And yes, so those are the three that they're. Unfortunately, some version of this happens or comes across our plate all the time. And these are, I understandably there's a lot of things to focus on when you're starting your business and maybe they're just not high priority, but they really should because there can be consequences if we don't.

13:02
Daniel Scharff
And that last point, I'm sure everyone has seen how this can play out. And I don't know a lot about the fundraising topic, but like, oh, what kind of equity is it? Like, oh, are these common shares? I mean, that can make the difference between getting paid out and not getting paid out when the thing sells, which is when everyone starts paying really close attention. Or if you watched the social network or read the book, you saw what happened with Eduardo Saverin shares and they basically just then realized they could dilute him all the way down. So there are a lot of things that can happen that you may not understand that wouldn't be covered in just a quick cursory conversation or offer about something.

13:35
Daniel Scharff
But I have to ask you, I feel like everyone listening to this podcast would have just been shouting like, no, wait, ask him about that first thing a little bit more. So you were mentioning about the contractors and full time employees. What are the risks then about contractors? Because I think a lot of the brands are those scrappy people early on, like, okay, yeah, this makes sense, let me work with them as a contractor. Wait, what could happen though?

13:55
Ryan Hall
Yes. So the consequences are one, as employee, you need to payroll taxes. There's a company obligation on that part. And generally if you're not paying taxes, the government's not too happy about that. And there's often penalties and damages and back taxes that can really compound that issue. Right. And that's the biggest thing on the company side. There can be some rights for the contractor as well. They should have received some of these additional benefits. Maybe there were some different compensation arrangements, they weren't hitting minimum wage or something along those lines. And so the biggest thing is taxes and potentially covering the lost compensation. And going back to kind of theme that keeps recurring here, that is a big issue if you're doing that with one person. If you've engaged 30 independent contractors and all of them should be employees.

14:45
Ryan Hall
Then all of a sudden you have a very big problem. And so it is very important to do that, I think. Yeah, so those are kind of some of the problems that you'll typically run into.

14:53
Daniel Scharff
Okay, very helpful.

14:54
Blake Horn
And I would add, that is the number one thing that seems to pop up investor or acquirer diligence. You can have a squeaky clean company legally, but that is one of those areas that we very often see pop up. So it makes sense to pay attention to it.

15:16
Ryan Hall
Yeah, I think the common thing that we hear is that more or less, no company does it correctly. If you haven't actually had an expert come in and do a full review of everything, almost everyone is doing at least some misclassifying someone incorrectly. So it's a very common problem, to say the least.

15:33
Daniel Scharff
Well, that's very interesting because you guys have been at those deal tables and you see the kind of things that actually get looked into. And so that probably is helpful for everyone to know that be one of them. Blake, what are some other CPG specific things you see come up a lot? You know, as opposed to tech or other kinds of startups, what really is more likely to happen in this CPG world of ours?

15:55
Blake Horn
Yeah, look, I think it's related to what Ryan was talking about. I think as a CPG business, you might have corporate employees, right? Your coo, your CEO, whoever else that are salaried employees. They get bonuses, they get different types of compensation at the same time. You might, as you grow, start having a lot of different types of employees that might be hourly employees where you have to pay attention to things like overtime or where the considerations and potential liabilities differ. Like if you have somebody that is your contract manufacturer every day or out in the field as a sales rep or working with your distributors versus somebody that's in the office behind a desk. There's different considerations in terms of what the potential risks are and what you have to be paying attention to.

16:47
Blake Horn
So I think CPG is interesting in that way that you have a lot of different types of people in different roles that you don't necessarily see in a tech business where it's maybe just all salaried engineers working on. On the product or in other. So I think that is, especially if you start to get into your own manufacturing and running your own facility, then you're dealing with all sorts of different potential issues there as well.

17:14
Daniel Scharff
That's pretty interesting because even having run a brand before, we would have like an operations manager and then all of a Sudden there's something going on at the warehouse and it's not going to get done unless we actually go and help them physically stack something. Like wait, can we ask our person to do like. I don't know, I would do that as a founder, I don't care. But like are we allowed to ask them to go and like lift stuff? I don't know. We didn't do like a training on that. Yeah, there is some murky area there. So what is the right way then to start hiring people? What kind of documents definitely should I have in place as I start growing my team?

17:45
Ryan Hall
Ryan? Yeah, so I think first of all you need a clear offer letter, right? So if you're going to go and hire people, typically don't need a full detailed employment agreement for everyone, but you need at least an offer letter. It should clearly state the position, should state the compensation, should very clearly state the start date and that's at will status, right? That there's not a protected employment term. That ultimately if the company decides that it's no longer working out, that you can terminate the employment and it has to have at a very minimum those basics. If there's equity, you would typically want to state some in the offer letter about that as well. Another big point is very important is in the CPG world, right? There's so much, especially as a startup, a lot of times you don't necessarily have business.

18:29
Ryan Hall
You're not handling all of your own manufacturing, you're not handling all of your own distribution, not handling a lot of the actual, the physical aspects of the business. So most important thing is your ip, right? Your products, your formulas, recipes, your marketing ip. And so it's very important to have a confidentiality and invention assignment agreement. So that says you know all the IP that you learn about as an employee, you are going to keep confidential and then anything that you create while working for the company that's related to the business of the company, that the company owns it, that ensures that the most important component of your business as a running a CPG business is all going to be protected, kept confidential, owned by the company, it's yours. Another big point is employee handbook.

19:16
Ryan Hall
We kind of covers a little bit more of the detailed policies or essential policies of running a business. So looking at covering leave all of your policies on vacation and potentially maternity leave, those type of things should have anti harassment, making sure you're complying with some regulations that you're creating a proper workplace like that. Got to make sure you got a proper payroll tax set up, right? Making sure that automatically everything is going to be sending withholding to the government as applicable. And then the last point is really around equity. Right. If you're going to be bringing initial employees and giving them equity, there's gotta be proper documents for that. And so the big one we'd see is some type of plan. It could be a stock option plan, equity incentive plan, depending upon what type of entity you are.

20:00
Ryan Hall
But you have that and then really usually some form of grants that are board approved and just making sure you're complying with all the corporate governance requirements. So if you do all that, they're not really nice to haves, I would say, like they are absolutely the foundation of a defensible employment relationship. And so if you don't have any of these, you are leaving yourself open for problems down the road in some capacity.

20:25
Daniel Scharff
Okay, so if you're thinking about early stage brands who are also being a little bit scrappy, like what about if you bring on an intern or somebody that. Yeah, like what are some of the considerations for that? Because I see people post in our slack all the time, like, yeah, we'd love to get an intern, just like start light. You know, we don't really even. No.

20:42
Blake Horn
Yet.

20:42
Daniel Scharff
Probably they're not going through all the documentation for that. But how should you think about that kind of stuff?

20:47
Ryan Hall
Yeah, the safest approach really is just to pay your interns. There is an arrangement that you can have unpaid interns. So there's this test that you have to satisfy all the requirements of the test that it's really, it's like the intern has to be the one truly being the primary beneficiary of the relationship. The work needs to be educational, related to like what they're studying. They can't be displacing regular employees that you otherwise would have hired. Right. They can't be a substitute for hiring someone. And so for a startup where really if you've got a scrappy team, everyone involved is most likely doing real work that benefits the company, including probably your intern coming in, it's kind of hard to meet that test. Right. And so I would say the default should be that you should expect to pay your interns.

21:34
Ryan Hall
And maybe there's some circumstances that not the case. But I would never feel comfortable saying don't pay your interns without talking to someone, a specialist and really saying, signing off on it.

21:44
Blake Horn
Having been an unpaid intern many times, I can tell you it feels a lot better to be paid. So if you can pay your interns, if you can't make sure there's a legitimate reason and benefit to them, as Ryan described.

21:59
Daniel Scharff
Have you seen that actually go awry? Have you seen people have to answer to the state or federal government about it or to those interns later on? Do you feel like it's frequent that it comes back, even though obvious this is the best practice as you're talking about, that is how you should treat your interns, obviously, and pay people for work. But just curious, probably a lot of people are wondering, like, yeah, has that come up for people a lot?

22:20
Blake Horn
I think not in recent memory. I can't think of a government enforcement action around it. That's just my personal experience. I think more often than not, we see the companies that use interns, pay them. I think I have seen reputational sort of risk around it in terms of just when people are talking about brands and this topic comes up, you know, look, I think some people feel very strongly that an internship has so much value to it that it's worth doing in many cases without getting paid. And I certainly felt that way at times as well. But you sometimes do hear whispers around the industry of, you know, this brand didn't pay its interns or things like that. So it's really a pace by case sort of thing.

23:09
Blake Horn
And I think if you make sure to give the intern the right type of experience and a quality experience, and if they're getting school credit or whatever else it is, then you mitigate your risk there quite a bit.

23:22
Daniel Scharff
Yeah, very helpful. Okay, so let me ask you another question, which is if you're scrappy and you're getting this going. Okay, I've just heard Ryan and Blake, the pros, tell me I need to have all of these documents. Okay. But I don't necessarily have the big budget to go and get a really great legal team on this. I'm just gonna chat GPT this bad boy, or I'm gonna go and get a friend who's done this with somebody just like, hey, you have a different kind of company. It might be tech, but just give me all your documents. I'm just gonna tailor them a little bit so I have these and sign them. What would be the risk in doing that approach?

23:53
Blake Horn
Look, I think it relates to what we've been talking about around how these types of things tend to accumulate over time and become part of your standard operating procedure. And then all of a sudden, a few years down the line, you have the same problem with different people. Now, when it comes to templates and things like that, I think the important thing to keep in mind, especially around employment related areas is every state has different laws. Some states you can have a non solicit of Broadland solicit of customers, other you can't non competes other types of things you might want to do with employees. It differs state to state. The particulars around things like equity might differ depending what type of entity you are.

24:43
Blake Horn
An llc, a C Corp, an S Corp types of vesting terms you use, the types of equity structures you can use for these different types of entities. So someone might give you a template, it might seem perfect for your situation and then you don't notice that it's been set up for an LLC under a C Corp or hey, this is the greatest NDA IP assignment agreement form. Everybody uses it, but it was drafted for an employee based in Michigan instead of California. We see this type of stuff come up all the time. So in terms of using templates or getting advice from your friends that have done it before, I think that's great.

25:22
Blake Horn
I love when the client comes to us with a template for the purpose of answering some of the questions that are needed to figure out how to put together the best structure for that situation. That's great. But most of the time when a client comes to us with a random template they pulled from the Internet or that a friend sent them or whatever else, it's just not always the right starting point. And it frankly often costs more money to fix than to just start with the right starting place. So to me, if you want to be scrappy, don't hire that first employee until you're working late into the night and early morning on whatever you can do for your business. Or if you can hire one person to do the work of two, do that for a while.

26:08
Blake Horn
Like be scrappy in the way you run the business. Don't be scrappy by like ignoring legal requirements. That's not scrappy, that's something else.

26:18
Daniel Scharff
That's a great answer. It also made me wonder, Blake, how much are you guys using AI? A good friend of mine is general counsel for a company and she is using it a ton just for her own research. When she needs to look through a bunch of case precedent, she just like spin it up so fast. But she still needs to be the one who has the judgment to actually comb through the results.

26:38
Blake Horn
That's a great question. I mean we do use it for that exact purpose, for assisting in learning, for vetting the reasoning and the conclusions we're coming to. We don't use it to replace us. Maybe that day is Coming. I'm not so sure it is, but I think some version of it is coming. But what these AI tools can't do is they can't really get you 100% of the way. There's maybe it can generate a contract for a specific question, but at least for the time being, it doesn't seem to be able to do the real deep thinking and decision making and strategic reasoning that we help you do. So yeah, we use it, and I think it's been a really useful tool in terms of learning and helping us free up more bandwidth to be helpful to our clients.

27:27
Daniel Scharff
Totally different topic, but I've seen somebody very recently talking about using AI for a trademark application and surprise, it completely got it wrong. And now the brand is in hot water. I'm like, oh geez. Like, that definitely is not one of those areas where I would skimp on because it's not so expensive to have a lawyer just help you do that trademark properly. And that might be your most important asset. Hopefully it is in the long run if things go well. It just kind of blew my mind. I'm just, you know, chat. GPT is always so positive. You're like, hey, I was thinking about doing this. It's like, yes, that's a great idea. You, you're very thoughtful. What a good way to do it. Here's how you do it. And then it's just like, doesn't even give you any protection at all.

28:06
Blake Horn
Yeah, but look, I'm so interested. I know Ryan's been spending a lot of time on it as well, and I love people that want to be at the frontier of how you can use these tools, just do it responsibly. And I think for the most part, even our clients that are really using AI tools a lot, including in terms of contracts and negotiations and things like that, they're still coming to us to do the strategic thinking with them. They're similar to what I said before. We see most of our clients are using it a lot. Using it as more learning as opposed to the conclusion.

28:43
Daniel Scharff
Yeah, okay. So one of the areas that would make me most nervous if someone said they were using AI is especially around equity for early stage employees. Because, gosh, like, you do need to get that right for all the reasons we've been talking about. So what are the things like that you think founders should really understand when they're getting onto this journey offering equity options, profit, whatever to employees?

29:06
Blake Horn
Yeah, look, equity lasts for a long time, right? You're giving somebody a piece of your business Your baby in many ways. And I think the decisions you make early on around this topic follow you sort of through the rest of the history of your company until there's some exit event or other event where the cap table might change. So I think what I see a lot is for the most part, founders are thinking about equity. They understand that, look, there is a limited amount of the pie to go around and they're going to need to live with these decisions for a very long time. So I see a lot of thinking around percentages. Sometimes I see it as people giving up a large percentage early on without really thinking about it.

29:58
Blake Horn
And sometimes I see people holding on too much early on, not thinking about the fact that sometimes owning a smaller percentage of a bigger pie is going to be a better result for you. So I see it work both ways. But what I don't see people focusing a lot early on is around what happens if something changes. What happens if somebody leaves the business? Well, should it be different if they leave under a good situation versus a bad situation? What if you just decided that you didn't need somebody anymore verse they stole from you or some other major event like cause event? So I don't always see people focusing on that part early on. But at the end of the day that can matter as much if not more than the percentage you're allocating to somebody.

30:47
Blake Horn
Because as your business grows, as time goes on, you want to make sure that the people that own part of your business don't necessarily own it. Regardless of what happens, you need to pay attention to, okay, what am I trying to do by allocating equity to somebody? Is it to just reward them for something they've already done? Is it to incentivize them to stick around for a long time? So I think in addition to focusing on percentages, it's really important to think about the next step if something changes and how you want to see that long term plan play out.

31:27
Daniel Scharff
I like that. And I think it's really important for so many reasons for everybody to understand what happens if things don't work out or what happens if this happens to the business just so everybody's aligned. It's so sad to see when it wasn't clear to people and then relationships get ruined. And this is a small industry and you hear about it like they did this to me and I can't believe it. It just, I really like for everyone just to understand what the deal is going in. Ryan, what about people use vesting schedules a lot, right? So like yeah, there's the equity. But because I want you here for a long time. So you create vesting schedules. How does that work from a legal perspective and business perspective?

32:07
Ryan Hall
Yeah, so I think the overall goal of vesting schedules and cliffs and everything are. They are. They're ultimately to align the incentives of the service provider with the business while also giving protections to the business to make sure that it gets the outcome at once. It doesn't give too much equity when those outcomes don't happen. Right. And so when you are hiring or engaging someone to provide services or outcomes to the business, you can utilize a vesting schedule to help ensure that if they actually succeed and deliver those outcomes, they're going to be rewarded. Right. And that creates a very strong incentive to perform. If you tie something very specifically to you only vest and get equity, if X happens, they're going to want to do that X.

32:54
Ryan Hall
So if you align that X outcome with something that is this is what we need to grow the business for this specific person, you have a very aligned incentive structure in place. And so I think the proper structure of what you're looking for it will depend upon the position. Right. So there's a couple, the most common buckets that we see are really around either performance based vesting schedule or time based vesting schedule. And so if you have someone who is in a position where they have metrics that they're really trying to push for, so that the most common thing that we see this in is it sales position.

33:30
Ryan Hall
If you put someone to cover sales in a given channel or account, you can tie vesting to hitting those numbers can be the year hitting those numbers at any time, or hitting those numbers this year or next year. And so that crit one that's going to make that person work that much harder, they don't just get their salary, bonus, whatever they're getting, they get equity if they do this too, they're going to go work their butt off for that. Right. And if they don't hit that, then the company hasn't actually given any equity that does invest. You have not had the dilution that occurs that you are only giving more of the pie if the pie is actually growing because that person is hitting their performance metrics.

34:10
Ryan Hall
You know, if it's a more routine role, you know, someone serving as a comptroller or HR or something like that, they don't really have metrics that they're trying to hit quite as much. And so really you want those people to stick around, learn everything about the business, become just Integral components of the team. If that's the case, you're probably looking more at time based vesting to just stick them around or keep them around. And so the most common structures that we see usually is in the CPG world is four year vesting with a one year cliff. And so that ensures that you give them equity if they leave too early.

34:46
Ryan Hall
You know, sometimes you get six months in, nine months in, you realize this person is just not going to be a fit, this is not working out, or they decide to leave for whatever reason, then you will not actually vest anything. And that way when you're 10 years down the road, you don't have all these little people on the cap table that stuck around for six months and really didn't contribute meaningfully to the overall growth of trajectory of the business. So those are what we see in terms of keeping people around. Another big thing that you really have to focus on too is there going to be acceleration upon a sale? In the CPG industry, we most commonly see that there will be acceleration.

35:25
Ryan Hall
So that means that if you give someone, either someone they haven't been around to hit the full vesting or maybe they got a top up grant or something like that, if that happens and the company sells, that's a great outcome. Right? And so question is, should they be able to participate with their full grant despite not hitting it, or should they only get whatever portion that they add? So that's another big thing just to talk about and think about and have everyone driving towards unequivocally let's get a sale outcome that everyone's really looking for.

35:55
Daniel Scharff
These are great considerations. It's so hard to think about contemplating all of that, like, okay, I'm hiring this person. But also what happens if it's a sale? Like what does that even look like? I don't know, it's early stages. But that's why people have you guys around to help them out, because you've seen it before and you know. So one thing I'd like touch on a little bit more is around co founder agreements because I think that people can go often go on into that with a very good heart and spirit of hey, do you want to do this business with me? Great, let's do it. It's going to be equal, but it's no thing in history that's just like equal like that.

36:32
Daniel Scharff
You know, there's always gonna be one person who puts in a little bit more or the other person has a family commitment that then starts taking up more of their time or they get interested in something else. All of these things you couldn't predict that actually will vary their contribution and impact the business. But did you talk about that? What does that mean? Like, what are some areas of concern you see come up with co founders?

36:51
Blake Horn
Yeah, look, I think it tends to most commonly revolve around ownership and role. So when you're starting a company with somebody, whether it's a complete stranger or your best friend, my advice is as early as possible, make sure you are aligned on those topics. And by the way, sometimes that's a dynamic conversation where you might be figuring out who's best suited for a certain role. And so this is somewhat an ongoing conversation. But certainly before you start raising money, going too far down the road, bringing other partners or employees or whoever else into the mixture, you want to have a clear agreement on those basic principles. And what are those basic principles? Ownership. Whether that ownership is subject to vesting and then just generally what you're supposed to be doing to have that ownership. And that can take a lot of different forms.

37:51
Blake Horn
Sometimes one co founder is investing much of the startup capital and the other is investing more time or in contributing the brand name or some other important IP to the business. So it can take a lot of different forms. But I think getting clear on what each person's contribution is, what their ownership is, what their ongoing role will be is really important. And getting that in some sort of clear written form, and hopefully that's at least some sort of initial agreement or even if it's just nothing more to start than a very clear email where this is all spelled out, that can save a lot of issues down the line. I do think it's worth talking about the concept of vesting with co founders, because I think people hear a lot of different things from different people.

38:45
Blake Horn
And this is actually one of those areas where I see CPG differ a lot from other industries like tech. Like in tech, co founders pretty much always sign up to vesting agreements. If one of them leaves early, they might forfeit some shares. In cpg, we actually see that less, I would say. And I think that flows a little bit from a couple things, you know, one of which is very often with CPG brands, the founders, the co founders are very much in front of the brand as a face of the brand, kind of known as synonymous with the brand. So I think that plays a role. And then also just the fact that a CPG brand takes a lot more money to get going than a tech startup.

39:31
Blake Horn
I mean, a tech startup might have like very little if no real cash upfront needed to get it going and make it a revenue generating business. In cpg, you need to come up with the product samples, get it made at a commercial scale, bring on people to help with the recipe. There's a lot of upfront costs. And so what we find is co founders say to themselves, well look, why should I be subject to vesting? Because we each put $50,000 into this business and contributed our blood, sweat and tears and our ideas. And so I think in this industry that conversation around co founder vesting is not as straightforward and is not really as singular as we see it done in other industries.

40:18
Blake Horn
But I do think it's an important conversation to have because we have seen best friends start businesses together, agree that there's not going to be any vesting. And what happens three years in, four years in, one co founder decides this is, you know, his or her life work and goes all in on it. And the other decides this is not as interesting to me or I'm not fulfilling the role that we thought I was going to fill. And that can be dealt with upfront through vesting agreements. And other times you have to deal with it in the moment. And that can be a really comm. Complicated and taxing conversation. Especially when you're talking about like friends or family members starting businesses together.

41:03
Daniel Scharff
Not to talk too much about the Social Network movie, but yeah, that just reminds me of like Eduardo wrote a check, which was a small check, but loomed very large at the beginning.

41:12
Ryan Hall
Right.

41:12
Daniel Scharff
Because that was all the money that they had. But then in the long run is a tiny, tiny amount of money. But then he went and took a different job. He took his summer internship or whatever. He didn't go out to the house. And so like, very different commitment from people who at the time I think would have all looked at each other as co founders. Right. So I mean, just really good to spell that stuff out as detailed as you can, I think really to protect people's relationships as well. Because if, again, if it's all clear, at least you know what happens if X happens, then Y. So, okay, unfortunately, maybe my least favorite part about any business, sometimes things don't work out and you have to let people go.

41:51
Daniel Scharff
What do you feel like is the right or wrong way to do that, Blake?

41:55
Blake Horn
Well, I definitely know the wrong way, which is to do it without thinking. And I think snap judgments around things like terminating people is always the wrong way to go. Look, sometimes circumstances dictate that you have to take Action really quickly. Like, you find out somebody is stealing from you find out somebody is, like, engaging in some sort of egregious harassment or putting people's safety at risk. So I want to differentiate between acting impulsively and acting swiftly. Acting swiftly can always be or is often a good thing, as long as it's thoughtful. So I think what's important to keep in mind is to think about if you're thinking of terminating somebody, what have you done to that point to establish a basis for letting that person go?

42:49
Blake Horn
And so, for example, if you're terminating somebody because you think they weren't doing a good job, did you give them an opportunity to improve? Did you give them some sort of warning or other communication and give them an opportunity to do better? If you haven't done that and somebody messes something up or they're doing the wrong thing over and you just decide, okay, I'm just going to cut them and no more of this. Well, you haven't really done a great job as a manager in making sure that person had an opportunity to get better. And look, sometimes it's not going to work out. People aren't going to improve. They're not the right fit for whatever reason.

43:30
Blake Horn
But it's always a good idea to make sure that you've created that sort of performance opportunity for people in order to make sure that you know, they don't turn around and try to claim that actually you were terminating me for some other unlawful basis. I think it's also important to think about what you're going to say in those meetings with employees when you're having a conversation about a termination of employment, being prepared for that, not just walking in saying, we don't like you're not doing a good job and letting somebody go. I think it's really important to remember that every communication you're having around the topic of termination creates some potential for risk. And I think you want to make sure that you are being very clear about the reasons somebody is being terminated so that there's a record of why the termination occurred.

44:26
Blake Horn
And to the extent there's going to be things like severance payments or whatever else, like, I think it's important to make sure that's spelled out very clearly. But maybe that's not always the thing to try to cover in that initial meeting. You can focus the initial meeting on sort of the more personal aspects and leave the discussion of separation terms and like that to a separate communication. We do get the question a lot around you Know, when do I do a separation agreement? When do I pay severance? When do I not pay severance? For the most part, if you're letting somebody go, even if it's performance based, it's usually best to think about it as a, the same way you would as a.

45:12
Blake Horn
Without cause termination in terms of it's typically always worth it to provide some sort of severance payment, whether it's, you know, two weeks or it's a month, depending on how long the person has been around. But if you're giving somebody severance, something they're not necessarily entitled to, you can ask for a release from them. And then when you go to raise your round of financing, when you go to sell your business and an investor or an acquirer is looking back at your history of employees and separations, if they see that, okay, well, yeah, they paid a little bit of severance to people and they got a release from every employee that left. And that goes a long way in terms of appearing to have clean diligence to an investor or an acquirer.

45:59
Blake Horn
But look, obviously that doesn't help if you have a long history of having lots of employment claims around employee determinations, or all of the people at your company have a six month tenure. That could be evidence of a different type of problem outside of your ability to clean up some of these things from a legal perspective.

46:21
Daniel Scharff
All right, that is a lot to digest. Ryan, let me tag you in here. Any thoughts you want to add on to this?

46:27
Ryan Hall
Yeah, we've talked a lot today about the how creating problems at the beginning could create a compounding issue. Right. That you just keep on, you build up this problem and problem. And a separation agreement is a very special and powerful opportunity to be able to clean things up mostly with the given employee who's being terminated. Right. So if there's not clear terms about what you had agreed to with equity previously, or if there was never an assignment of inventions agreement or confidentiality agreement expressly agreed to, you can plug those things into a separation agreement. And then, yeah, it wasn't a great practice that you missed that the beginning. But now you have an enforceable agreement that really plugged the holes of these issues. And so obviously that doesn't fix the problem.

47:18
Ryan Hall
If you have a pervasive practice of not entering into these agreements, you still have everyone else who hasn't been terminated and signed a separation agreement to deal with. But it can be really helpful for typically, if there's a separation, maybe there's just a higher risk with that employee in general, for those problems. And so it is a great opportunity. The one caveat for this is there's. This is something that is, I would say, is very important to make sure to have special counsel or special advice on this, because there are a lot of legal requirements, things that vary based upon the terms of the situation. How old is the employee, how many employees are being terminated at one time?

47:57
Ryan Hall
All of those things create these extra requirements that it's not just like signing a contract saying, here's your severance and here's a release, and that's it. You do have to have proper practices in place and make sure all the terms are correct. And it's just a little bit of a complex area that you didn't make sure to get right on the terms.

48:15
Daniel Scharff
All right, very helpful, guys. This is really important stuff, I think, for everybody to hear now, whatever stage of the journey they're in. I'm sure no one has done this perfectly. So this is very good stuff. So, Ryan, as we just wrap up here, let's say a founder is hopefully doing great, and now they're thinking they could start fundraising. What should they go and try to clean up right now to make that process go a little bit smoother?

48:39
Ryan Hall
Yeah. So I think it's, in some ways, it's a little bit of a recap of what we discussed in terms of the common mistakes and things to put in place. Right. So to go in, I think, and get to do an audit on your workplace classifications and to have someone take a look, are all of your employees and independent contractors properly classified? It's a lot easier to go and fix those when you're not staring down that barrel of financing or sale or some other acquisition. I think getting in place NDAIP agreements as well, that's very important to make sure. Sometimes these things just takes time to do it. And there's also.

49:16
Ryan Hall
You give people a lot of leverage to be able to potentially create problems if they know, hey, the company's about to sell and if I create some problems, maybe they're going to be very incentivized to, like, pay me something in order to sign this. If you're just doing this in an ordinary course, then I think you can handle it without that risk of it creating a bigger issue. I think it's really easy to come and do a look at your employee handbook, make sure it's current, make sure it covers all the jurisdictions that you're in. There's sometimes special terms based upon which states your employees are in. I think coming in and doing Blake's point about things going wrong, making sure that all of your performance issues that have been happening are properly documented. Create a personnel file for each of your employees.

50:03
Ryan Hall
All of these things are really going to help get yourself properly buttoned up. And it's a lot easier to do that over a course of a couple months, as opposed to just trying to rush and get ready for a transaction. So, yeah, I think if that's something that is coming down the pipeline in the next six to 12 months, these are all things that are very doable. And if you have a feeling that maybe we just haven't been quite as buttoned up as probably could, especially after listening to this podcast, these are things that can really help that situation.

50:36
Daniel Scharff
All right, Ryan, and as we're closing up here, any final words of advice for founders and also, what's the best way for them to stay in touch with you?

50:43
Ryan Hall
Yeah, so stay in touch with us. Please reach out. I think you can see our email address and our website always at expo conventions and related items, and happy to connect live as well. I think in terms of advice for founders, overall, the biggest thing is, like Blake said, there's a difference between being scrappy and being something else. And there's a lot of areas where we should be trying to run things as. As lean and efficient as possible, but it's not in the areas where you're very prone to just be creating bigger problems. And so I think there's a real benefit to just having a little bit of focus on this, a little bit of analysis that can pay dividends in the long run.

51:27
Blake Horn
Yeah. And I think just to add quickly to that, like, this is your team. These are the people that are going to be helping you achieve. And I promise you will not be able to achieve what you're trying to do in this industry without a team around you. So think about that early. And if you do and you pay attention to this stuff early on, you're going to build that into the DNA of your company, and that's going to, you know, that's just going to pay dividends over the long term. And so I think it's just one of those areas that it really pays to pay attention to early on.

52:01
Daniel Scharff
All right, well, thank you to both of you. This has been a very illuminating episode. And also, I just have to say, I love doing episodes with the team from GL because obviously, you guys know your stuff, but it also just. You guys, it's really clear how much you all love this industry. It seems to me, like, you're all really happy in your job, doing what you're doing, working with each other, getting to work with all these brands. So the passion is very obvious and your expertise runs really deep. So I always learn stuff on these. So thank you guys very much.

52:35
Blake Horn
Really appreciate that.

52:36
Daniel Scharff
Absolutely. And I'll see you guys very soon at our many industry trade shows and events.

52:41
Blake Horn
Looking forward to it. Thanks so much for having us, Daniel.

52:44
Daniel Scharff
All right, thanks, everyone. Well, my friends, we've now arrived together at the end of another episode of the Startup CPG podcast, the top globally ranked podcast in cpg. As you may know, we're not just a podcast. We're a community of brands and experts. And you should join. You can sign up @startupcpg.com you'll then get an invite to our online Slack community. You're going to hear about amazing events near you, all of our special opportunities to get you in front of buyers, investors, brands, and more. It's a free community. So what are you waiting for? I will see you there or on our next episode. Bye. Bye.