The Startup CPG Podcast


In this episode of the Startup CPG Podcast, host Daniel Scharff sits down with Laura Jakobsen, founder of Riot Energy, and Daniella Carelli, Special Counsel at Kelley Drye & Warren LLP, for a deep dive into co-manufacturer due diligence — finding the right partner, evaluating them properly, and getting a solid contract in place before things go wrong.


Riot Energy has scaled from an early-stage beverage brand into nationwide distribution across Whole Foods, Costco, and convenience, all while pushing co-packers to produce a next-gen energy drink with no artificial sweeteners, no added sugar, and real ingredients. Laura brings the brand-side battle scars; Daniella brings nearly a decade of legal experience representing both brands and co-manufacturers, giving the conversation a rare view from both sides of the negotiating table.


Together they unpack what actually separates a good co-man relationship from a costly one — not just price per unit, but reporting transparency, yield loss tracking, IP protection, and the kind of contract flexibility that only shows up when you ask the right questions upfront.


Listen in as they discuss:

  • Why the "partnership approach" matters more than price when evaluating a co-manufacturer
  • The three reporting buckets every brand needs from day one: attainment, inventory, and shipping/receiving
  • A real contract clause example — flavor-swap flexibility when ingredients don't show up on time
  • How to protect trade secrets when a co-packer has full visibility into your recipe, including working with flavor houses to fragment the formula
  • What to actually look for during a facility walkthrough, from hairnets to batch cards to QA culture
  • Why founders should build their own baseline co-man agreement instead of just redlining the co-packer's template
  • The case for flexible payment terms over the lowest per-unit price — and how that impacts cash flow
  • Why yield loss tracking is one of the most overlooked (and costly) blind spots for early-stage brands
  • When a PO-to-PO relationship is fine — and when it's time to invest in a formal long-form contract
  • How to test whether a potential co-man will actually be a partner, not just a vendor, before you sign anything


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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.

Daniella Carelli
Brands tend to loop in the legal team when something has gone wrong. But what I really pride myself in trying to do and I hopefully have achieved with at least Laura and T Riot and Riot Energy is at least getting you set up to succeed with the partner long term so that we're really preventing those worst case scenarios from the get go. Right. And that's home hopefully saving everyone money.

00:31
Laura Jakobsen
I think there's so many things too just that operational perspective is working with legal to figure out how to protect your IP is one thing. But then I think also Daniella's helped us work with flavor houses who are doing like yeah, okay, we use two flavors or whatever in a product so let's have them make a custom flavor or you know, what are ways that you can create barriers in your product whether from other vendors so that the co man really doesn't know the whole recipe. There's ways to block and tackle recipe so that not one entity knows exactly how it's being brought together.

01:08
Daniel Scharff
Hello my friends. On today's episode we are talking co main due diligence, finding them, evaluating them and getting a good contract in place. It is such a huge piece of the puzzle for brands and today we have two really important perspectives, the brand side and the legal contract side. We're joined by Laura Jacobson. She's the founder of Riot Energy. They have scaled like crazy and as you'll hear she has a ton of experience on Coman due diligence and building effective relationships with them. And we have her partner in crime her legal contracts go to all along her journey. It's Daniel Corelli from our partners at Kelly Drye & Warren LLP. You're going to hear Daniel has so much to tell us from years of representing brands like Riot Energy.

01:50
Daniel Scharff
But also she represents a lot of Comans so we're going to hear the kind of things that they want in contracts as well. And if today's conversation gets you thinking about your legal game plan, definitely check out Kelly Drye's consumer packaged goods practice. They support CPG companies in food, beverage supplement, beauty, wellness and alcohol across corporate transactions, advertising, IP litigation, employment, food and drug law, trade and privacy. Their website is in the show notes. All right, here we go. All right, welcome everyone to the podcast. I am so excited to have Laura and Daniella here. We're talking about one of my favorite topics which is that lovely op topic of coman due diligence. So I'm really pumped here because we have two different perspectives.

02:37
Daniel Scharff
We're going to hear about it from a brand who has done this kind of due diligence and found their Comans and also from a legal expert, because I think probably that is the most important perspective that you can have here because hopefully nothing will ever go wrong with your coman, but probably it will. So you definitely want to have this stuff really clear at the beginning. So to kick us off, let's start out with some intros, please. So, Laura, do you mind doing the honor of introducing yourself first? First, please.

03:04
Laura Jakobsen
Yeah. Thanks so much for having me on today. I'm the founder of Riot Energy. Just for anyone who may have not been exposed to Riot Energy, we are the next generation's energy drink. So we don't use any sucralose or no artificial sweeteners and no added sugar, but give you the same amount of energy as a traditional energy drink. So a super real ingredient beverage. And that's also been pretty innovative in the co packing space. So we've definitely done our fair share of diligence and pushing the boundaries of what can be done by a co packer just to give everybody a sense of where the brand is. We are nationwide. We're nationwide. In Whole Foods, we have developed the natural channel. We have basically really focused more.

03:48
Laura Jakobsen
So even though we've expanded in Costco and grocery, we are very focused on expanding our footprint and convenience. So we're just created that bridge to mainstream to expose more people to the brand and gain more market penetration. And the number one channel where people are instantly grabbing that energy for their daily consumption to get in front of them. So I think it'll be interesting today to talk through the different stages we've lived and how to get started with co packing, but then also understanding that real point when you have to be prepared for growth, what does that mean for a brand as you go and evaluate your co packer at the same time for that increased demand and velocity that we all know from beverages and convenience can be creating a lot of pull. So happy to share any insights I have today.

04:37
Daniel Scharff
All right. And it's very impressive. I know I've always seen it everywhere and I'm jealous. I never got that far into the growing inconvenience journey. I know that's a whole different beast from the early days of getting into Whole Foods and trying to figure out how to make it work there. So that's a really exciting part of the journey. And from a co man perspective, can you give us an overview there? Like, how did it work for you? Did you like find your dream Conan in the early days and they've just been the best partner to grow with or you had to find a couple different ones at different phases to support all the growth that you've had.

05:07
Laura Jakobsen
Yeah, we definitely. I think that's one of the things I'd love to talk about today is that the journey of developing the beverage, I think we all chase to secure so much capacity and really the goal is to make sure you have that customer demand first before you get tied to such large moqs or partners that we all know that just add credibility to the brand and knowing that they can produce well and they can produce a lot. So I think, yes, we've been on the journey of co packers. We're pushing the envelope on real ingredients and fresh ingredients in the space. So we definitely have developed some unique SOPs and it takes a real partnership approach to be as innovative with the product as you want to be, but still be dependent on a co packer.

05:54
Laura Jakobsen
And so we've definitely gone through a stepped process where we not only were leveraging co packers to do something very innovative, but were learning about the product along the way and making changes and need a partner to help us understand how we could address those changes and still increase operational efficiency when we're pushing the envelope. So Danielle has been a great partner in that. And I think one of themes that you'll hear as we talk today is all of these discussions and contracts really help set expectations for both parties and that's like the most important thing. So that's been our priority as we've made these hops from a different co packers and needing different capabilities is how do you understand what your expectations are and how you work together.

06:39
Daniel Scharff
I love it. You're just making me reminisce on the different scale of comands that I've seen from the early one that we launched with that it was so cool to just see how their process and facility worked and understand how to line. And then eventually visiting a crazy huge coman and just watching the sheer speed of cans spinning on the line, honestly, is one of the most beautiful things I've ever seen. It was crazy to see. I don't even know why they were interested talking to us because were not at your level where we actually deserved to be talking to a coman like that. But it was, yeah, for sure. Like, I really hope an early brand never sees that when they're talking to the smaller comans because they'll be like, I want that though. But like, no, you're not ready for that.

07:24
Daniel Scharff
You're not Ready to go a million miles an hour in the fast lane, yet you need to learn how to actually operate the vehicle first.

07:30
Laura Jakobsen
Yeah, I think what people forget is there's as much of a startup mentality in the co packing world as there is in the brand world. And like, there are co packers who are willing to work with you as you learn more about your product and what you really need, and they're built for that. And there are co packers who are built for speed and efficiency and. And both are great. And both are needed. And both are needed at different times.

07:52
Daniel Scharff
I like that. They really are entrepreneurs, a lot like us, with different skill sets and different reasons that they do it, but I really have been able to bond with them in a lot of ways over that. Okay, Daniel, let us tag you in here. So that is awesome to hear because for sure, I felt like my legal counsel was there with me. Maybe not in the room, but I was definitely calling them, like, hey, what do I need to ask about? Because, like, there's a lot here I don't understand and I know it can go real wrong. First of all, just a general intro, please.

08:16
Daniella Carelli
Yes, yes. So I'm special counsel at KellyDrye's New York corporate practice Group and encounter a lot of CPG brands and manufacturers on both ends of the spectrum. You know, we represent ourselves as a full service law firm. So while I'm in corporate and I handle all the transactional work like manufacturing agreements and M and A and financings, we have a really robust employment practice. Tax counsel IP is huge. So we try to hit all aspects that a CEO or entrepreneur would try to encounter at some point along the lifespan of the company.

08:50
Daniel Scharff
I don't know why I never thought about it that way, but when I'm like, gosh, like, I wonder why the lawyers seem to know so much about how this manufacturing process work. And they're like, oh, you also work with the manufacturers in a lot of cases, so you actually really understand both sides of it. That must give you a lot of additional perspective when you're working with the brands too.

09:09
Daniella Carelli
Yeah, it's really fun, honestly, because we get to wear not only our legal hat, but also our entrepreneur hat as well, and really learn a lot from the business. I've been so lucky to work with Laura for most of my career, almost 10 years now, so she has taught me so much just from the practical perspective and trying not to get totally hung up on the legal jargon. Right. That we all get tied up in, but is equally important.

09:35
Daniel Scharff
Yeah, I'm Kind of wonder what a legal expert on manufacturers, what's going through their mind when they're drinking a can of something that they get from the store versus just a regular consumer, all the things that they might wonder about. But we'll get to that another day. So to kick us off here, Laura, I'm going to come back to you. I would love to just know when you're actually looking for a coman, what are the things that you're really considering at that point? So I know, I mean the thing that the CFO is always going to care about a lot is just that price, that number. Because the early stage, the later stage, that can be really different numbers in terms of the tolling. So the kind of cost per can that they're adding beyond all of the actual ingredients and all that stuff.

10:15
Daniel Scharff
So what are the key things that you would typically be looking at?

10:19
Laura Jakobsen
Yeah, I would say just through my experience in Riot, that basically no matter what stage you're at, the number one filter is a partnership approach. I mean, every company is growing and emerging, that's leveraging co packers and things come up. Right. And you just have to really have that relationship to be able to work through things. And I think most people think through the big things, but there's a lot of small things that come up. And that's where I like Danielle and I really have worked together for a long time. And I'll go back to like, her words of wisdom early on were like, you just have to make sure expectations are clear because when the small things come up, like you don't want to have to be debating who's responsible or who's not responsible.

11:06
Laura Jakobsen
So I think it's price is definitely important and we're all getting there, but there's so many other factors that end up costing more through mistakes or through missteps or through lack of communication or whatever it is. So I just think that real working relationship, both in being able to be transparent with each other, but also especially in that early stage curve, working through operational efficiencies, through production, like that's their expertise, it's not a founder's expertise. And so really being able to use that joint wisdom to bring it back to the brand and what you have to do to revise your standard operating procedures or whatever it is, or to source something differently is really important. And I think adjacent to that is also the reporting system.

12:00
Laura Jakobsen
So so many of us go in and start looking at how much is it going to cost and how many cans per minute can you run and all these are nice people, but if you don't have access and consistent reporting that are helping you with attainment. Did they produce what they said they were going to produce? That raw, good inventory that they're holding on you? Like, Daniel gave us such early advice on, like, dude, at a minimum, they have to give you, like, their base inventory, the balance inventory, at the ending the run, or else you're blind. You spend all this money and you don't know. You have no way to check and balance them on attainment. So. And shipping and receiving, those are the three big buckets.

12:39
Laura Jakobsen
And so to me, those are the two top priorities, the partnership approach and the real commitment to consistent reporting.

12:45
Daniel Scharff
That makes a lot of sense to me, the partnership approach. Just because things are going to go wrong and you're probably going to sign an agreement that says, like, yeah, if you book a day with us and then all of a sudden you don't use it, like, you know, we have to replace that revenue, you're gonna owe us for that. But when you're actually trying to get the run done, sometimes it is like being an orchestra conductor. Like, all the things have to fall into place at the right time. And that last tiny ingredient that is in your recipe, you can't make it without.

13:11
Daniel Scharff
If that all of a sudden is lost or something and, like, the whole day is messed, you're gonna really rely on that then partnership that you have with them, the relationship where then you're just, like, throwing yourself on the mercy of the Conan, and hopefully you have that good relationship. So I guess my first question is, how would you know in the due diligence if they will have that partnership approach with you that you're hoping to have with them, like, just a good overall working relationship? I mean, I think one is you can ask around, right? If you know people who work with them, and hopefully they have a good reputation about that stuff. But like, any other signs that, yes, like, they will work with you as a partner, not just as another person coming in to use their facility.

13:49
Laura Jakobsen
Well, I think you're going to learn on this podcast that Danielle and I have worked together for a long time, but I honestly remember Daniel coming to me being like, if they're not going to accept that in the agreement, then they are not good partners. Like, and it's true. So I think as you're going through the agreement, like, you just use a very tangible example. Okay, we're coming in, something happens. And we said were going to run when were going to run, but we can't run, like, that exact case amount for those flavors.

14:17
Laura Jakobsen
So, like, one real tangible example that Daniel put into one of our agreements in the early days was, hey, okay, great, we're committing to a PO for a certain amount of cases, but up until, like, Those ingredients arrive 14 days ahead of time, we should be able to mix the flavor count. Like, so if something happens to the mango flavor coming in, okay, we have less of that than we thought, but we have extra lemon lime flavor, so will produce more of another flavor. And so I think just really thinking through and look, the partnership with your legal counsel is really important too, because they've seen a thousand different scenarios. So, like, helping think through some of these known situational problems and putting into the agreement a real rational, practical response to a problem that we all know pops up to be acceptable.

15:09
Laura Jakobsen
And like, if it's not acceptable or access to information isn't acceptable, or a commitment to reporting is not going to be documented in an agreement, then, to use Daniela's words, they're just not going to be a great partner in the long run. If they won't agree to this, how are you going to talk to them when something really does hit the fan?

15:26
Daniel Scharff
I'm glad you gave that example, because I was wondering, I'm like, yeah, what is it that you wanted to put in there? Like, if they don't agree to this, then they are just not great. So I love those kinds of examples, but that makes a lot of sense. Daniel, I think a lot of what you do is trying to create the framework so people can have a good partnership. Right? So people understand the expectations and everything. Anything else that you would add onto that of, like, good ways to test the trust and the working relationship, what that is going to look like in this due diligence phase?

15:54
Daniella Carelli
Yeah, you got to spend time there. You got to go there. You got to check the facility out and do the diligence on the manufacturer that your investors are doing on you. You're hiring someone that's basically going to be like a brand protection agent that's going to have direct control over your product quality. So you need to almost be their arm. And. And I think the more time you spend with the principals of manufacturer, you'll get to know them in a sense, especially if you're doing a pilot run, which is great, that, okay, this is the right partner for us. There's telltale signs if they're not willing to negotiate for that flexibility, especially if you're early stage, and if they don't show signs that they want to grow with you know, maybe shop around. Right. There's a lot of opportunity out there and options.

16:39
Daniella Carelli
So I think rushing into the first partner you meet might not be always advisable.

16:45
Daniel Scharff
Okay, so the most common question we get in our community at least, which is a community of emerging brands, is going to be, hey, does anyone know a good coman in my area that is going to be like good on price but also has really low moqs like minimum orders that I can work with? And it's sort of like, yeah, like you have to understand there are different kinds of Colemans typically that are willing to do low moq versus ones that are the ones that are like really going to scale and work with you when you're bigger and have all the capabilities. I don't know.

17:14
Daniel Scharff
So I guess, Laura, I would love to just ask you about that question in general, like the conversation around minimum runs while trying to find the right fit for a coman that it can at least get you through, let's say one to three years.

17:26
Laura Jakobsen
Yeah, just the kind of conversations I have with a co man or how to find those. Because I think my personal experience in starting a beverage brand was you always hear about the bigger guys and it's really hard to find out about the smaller guys even from like more the emerging brands that you know about are still a stage ahead of you. And so I just think we really tapped into kind of people who helped in qa. So auditors and people were actually going to facilities to audit or people were helping like make sure you had your micro analysis, like what are your specs that you're asking? You're going to hold the co packer accountable to and that network of people is really tapped into other sources of co packing and have recommendations of smaller places.

18:13
Laura Jakobsen
And I think like even I fell into this in the earlier stage where it's almost an ego thing. It's like why I'm building the best next thing and I need to be attached to the best co packer that everybody knows about because I'm out there raising money and it adds credibility and validation. But the truth of the matter is like you really need to build the relationships with the right discipline owners who can help you unearth what's right for you at that time. And to me, co packing in the early stage, you need to tap those resources of QA and they're the most tapped in people who actually know how that co packer is performing right now with the staff they have right now with the economic environment they're in right now.

18:55
Laura Jakobsen
So it's also like highly prompt and timely information that you're getting a referral from someone. So it's always finding that other avenue to hunt to find more information.

19:07
Daniel Scharff
Yeah, okay. I get to manage this large community and it's been growing over time. But even when I was looking for a coman back in, I don't know, 2022, 2033 type timeline, I would use the slack and it would turn some things up and I would look at some of the databases out there and find some things. But really, yeah, I was actually just talking to some people in my network and other beverage companies and ops people and all these, like, unexpected sources. And all of a sudden you just find other comments out there that you've never heard of. Doing good work with beverage companies that you know.

19:37
Daniel Scharff
And then you can go and you can see what they're doing, but you can also, like, see some other brands that they're running while you're there, which I know you've signed like an NDA and you're not really supposed to know that stuff, but probably some people have then maybe given a rings those brands they've seen there and just asked about their experience working with them. I know I had one that I saw and I went down to visit them and I'm like, wow, this is a great facility. It's kind of weird that you're so interested to work with us because you're way beyond where we should be as a company. And I noticed one of the brands they were running and just through a friend managed to get a connection to them and talk to them about it.

20:17
Daniel Scharff
And I think I've told this story before on the podcast, but it was kind of funny because at the moment where they showed us the tunnel pasteurizer, the guy did this funny thing where we're like, oh, that's your tunnel pasteurizer. He's like, yeah. And he sort of touched his head in a funny way where he, like, rubbed the back of his head, which I pay attention to that kind of stuff in my life. And I like, watched him do it. He's like, yep, and that's it.

20:40
Daniella Carelli
And it.

20:41
Daniel Scharff
And it works great. And I noted. I was like, noted, okay. And then when I later then connected with that brand, I just talked to him a little bit about it. I'm like, yeah, how's it going? They're like, yeah, it's good. Their tunnel pasteurizer doesn't work very well. Yeah, it messed up a bunch of our runs. So just so you know, like, whoa, all right, so it's good to do your due diligence way too.

21:01
Laura Jakobsen
Daniel.

21:01
Daniel Scharff
I wonder from I guess a lawyer's perspective for the stuff that brands at the early stage should be paying attention to also when they actually go and do the due diligence, is it any different than at when you're looking for a bigger coman eventually to scale or are the fundamentals pretty similar?

21:18
Daniella Carelli
Yeah, I think the fundamentals should form the foundation for a long term partnership. But you brought up a great point. If you're visiting the facility and you see, wow, they're making other products, maybe even competing products just like mine that might be from one perspective a pro like oh, they know what they're doing, they're in the business of making this specific product. So you would think less likely things would go wrong. On the flip side though, you want to be really cognizant of your NDA at that time and hopefully eventually your terms on confidentiality and ip because while they have access to just tweak your recipe in the slightest way and call it a new product, the next thing you know it's just got a different label on it but it tastes just like yours. So how do you protect that trade secret?

22:02
Daniella Carelli
And you might weigh one more favorably over the other and you might view an experienced co packer that only works in this space as the right partner. And that's not to say it's wrong, but it's something to be mindful of when you are thinking about protecting your brand and your IP too.

22:18
Daniel Scharff
It's interesting when you say that because I don't know, I think I'm a trusting person in general and I'm like no, I'll be open and I'm going to show share my recipe. Hopefully we have an NDA and everything but I'll share the stuff. And like they're not going to do anything weird. They're like reputation means everything in this world. But like people who know more than I do often are like yeah, you got to watch out for this though. I bet you are one of the people who has actually seen all the ways that can actually go wrong. Whether it's competitive products and comans actually churning out their own products that look like you're a product.

22:49
Laura Jakobsen
Right, right.

22:50
Daniel Scharff
I bet you've seen some of these unfortunate scenarios for brands.

22:54
Daniella Carelli
Yeah, unfortunately I've probably seen more worst case scenarios because brands tend to loop in the legal team when something has gone wrong. But what I really pride myself in trying to do And I hopefully have achieved with at least Laura and T Riot and Riot Energy is at least getting you set up to succeed with the partner long term so that we're really preventing those worst case scenarios from the get go and that's hopefully saving everyone money.

23:18
Laura Jakobsen
I think there's so many things too. Just an operational perspective is like working with legal to figure out how to protect your IP is one thing. But then I think also like Daniel has helped us work with flavor houses who are doing like yeah, okay, we use two flavors or whatever in a product so let's have them make a custom flavor. Or what are ways that you can create barriers in your product whether from other vendors so that the co man really doesn't know the whole recipe. There's ways to block and tackle your recipe so that not one entity knows exactly how it's being brought together. And I think every founder should think through sort of how are they sourcing? What are they sourcing?

24:00
Laura Jakobsen
A flavor example is like a good generic example but there's other things too, like what can you do to pre pack it or pre blend or handle something on the front end before it even makes it to the co packer so that's seen as one ingredient. And I think then it's like between the legal protections that a legal team is providing for you and the operational steps of what you're doing, you've created a lot of barriers to getting it to taste exactly the same or be close to the same.

24:30
Daniel Scharff
I think that's a great point. And I guess just last on this point before I move on, let's say even like a non technical founder, anything else, Laura, when you're actually there at a coman that you think you should be looking around to try to get a sense for from me, like I don't really know what I'm doing. I'm going to try to like piece together how the whole thing works. I'm going to build that relationship with them and just ask as many questions as I can think to ask. But is there anything that you would say like make sure you ask these couple things or get a look at like just the organization or cleanliness of the ingredients, that kind of stuff.

25:02
Laura Jakobsen
Yeah, I think one big thing is seeing the facility like literally going on the other side of the door, like are they going to let you walk the facility? That's a huge thing because there are one that I've been in that are like here, watch through this window. And it's just like not quite the same. But I Think like when you say that we're a brand that went to the Chobani incubator and the number one thing that they taught us was qa. Qa, qa. Like keep your eyes open for qa. At the end of the day, you're responsible. It's your brand, whether it's the CO packer or whatever the economic or liability structure is in the agreement or whatever, it's your brand to protect. And so if they go into the facility, like are people wearing hair nets?

25:46
Laura Jakobsen
Do you have to wash your hands? Like, what are the procedures to even get into the facility? Like, what does the floor look like? Are the maintenance tables clean? Like, are the ingredients or whatever that they're using in the facility labeled? Are they on shelves and cleanly organized? Like how much attention to detail is in the facility itself to either avoid mistakes of putting the wrong thing in or just generally cleanliness. Because I know Danielle and I have talked a lot about this and it's just having a certificate is great assurance. Like if it's your SQF or BRC or whatever it is.

26:21
Laura Jakobsen
But every brand owner should have a right to see those audits or to have a third party auditor come in and do a visit or an inspection or review those documents so that you're hedging and you can understand like what areas you might need to really put some processes in or what kind of report do you really want to anchor in on to make sure that they are living up to the standards that those certificates provide.

26:48
Daniel Scharff
Laura, you obviously go really deep on this topic. Did you actually have a lot of background in this before even riot, or did you learn a lot of it because of this specific role going deep on the CO manage. And you learned it because you had to, because I think a lot of founders would ask that also, like, can I even learn that? I don't know. I like the sales and marketing side of it. Like, am I able to learn all that stuff?

27:08
Laura Jakobsen
I think it's your responsibility to learn it, I guess is my response. Like, maybe not everyone feels that way, but I think it's your risk, it's your business, it's your decision. At the end of the day, like you are left holding the ball. So I think what I have felt so passionate about it early on, like early on. Like when we very first started, we got it hammered into us at the Chobani incubator. So I think that brought more visibility to us to pay attention to it. But I sure am glad that was one of the Key messages that Hamdi was like, if you walk away from this program with not one other thing, like, know that you are responsible for being dedicated to qa and that's the most important part of building your brand.

27:53
Laura Jakobsen
And I really took that to heart because it's true. And especially when you're pushing the boundaries on what consumers want today, which is free from this and fresh and real ingredients, it becomes even more something to pay attention to because everyone handling your product needs to handle it properly or have the right refrigerators in place or whatever it might be. And so it's such a live wire in building the brand that every founder, CEO, whoever it is, it needs to be a priority. And when you're tightly resourced, it's up to you to make sure you've got the third parties around you. But you gotta absorb that intelligence along the way.

28:35
Daniel Scharff
That's a great thing to hear early on because I think when I did it, were so focused about like, what's the tolling, what's the cents per can that's gonna cost. Not understanding that actually it was the QA stuff that was then gonna turn that model upside down. You're like, well, now we have a couple hundred thousand dollars of inventory that we've got to figure out what to do with because this problem. So that really changes the math on those marginal differences pretty quickly. So, Daniel, let me ask you. I guess I didn't really understand this going in. I think there are some comans. They're like, cool. Yeah. We're like, you can just come in and use a facility. Great. Like, you may not need some kind of a huge contract with them to do it.

29:15
Daniel Scharff
There are other commands that maybe it'd be more common that it's like, no, we're going to do all this stuff for you. And we have annual contract and there are volume commitments in there. And here's what we're responsible for all this stuff. Like, what is most common? What do you recommend when it comes to contractual agreements with the CO man?

29:31
Daniella Carelli
Yeah, for sure. I mean, certainly from my perspective on the legal side, I love a long form contract because it hits everything, doesn't leave any surprises, hopefully. Right. It kind of accounts for all the scenarios that could happen. But the reality is, as you point out, a lot of early stage brands really don't have the budget for that and they have to operate sort of on a PO to PO basis. And I think that's actually okay. Depending on the product and the phase that you're in. If you're super early and you're getting ready to launch and doing your first pilot with the Coban. That's probably sufficient. Right. You want to make sure that they're the right partner before you dive into negotiating a 20 page agreement which could take a lot of time away from you running the business. Right.

30:18
Daniella Carelli
And so I think there's always a degree of risk without a formal contract and frankly it can, it could be sort of yikes like oh no, we don't have a contract and now we have to like look back at your emails and come up with a case to argue.

30:29
Laura Jakobsen
Right.

30:30
Daniella Carelli
But at a certain phase you will need an agreement. So like if you're doing a material financing, investors are going to be asking to see it as part of their standard diligence. So they're going to expect you to have something long term in place to secure that supply. So you can avoid it for a little bit I think. But eventually you're going to go down that road hopefully. Right? Because hopefully you're growing enough and the more you grow, the more leverage you're going to obtain and you should be using that leverage to get better terms with your production partners.

31:01
Daniel Scharff
Speaking of better terms, Daniel, give us the good stuff. If you're a brand, obviously we're all good partners, we want to give you good partners to our partners. But what should you really be trying to get in that contract with the coman? What are the things that actually could help you the most?

31:15
Daniella Carelli
Yeah, I mean the ideal contract from the brand's perspective is non exclusive. So you have backup supply if you need it, assurance on supply capacity. That might require a minimum order on your end but maybe that's something you can live with. Obviously price protections, right? Like yes, the price itself, but really understanding how that price is locked in, like is it fixed for a period of time? What are the guardrails on the co Packer being able to just willy nilly increase it? Do they have to show their work? You kind of want to make them justify all the things that are in the contract that benefit them so that you have a toolkit if something does go wrong to say okay, well at least I have the reporting that Laura mentioned so I can see exactly what happened here and what went wrong.

32:03
Daniella Carelli
But if you don't have access to that information and you don't have those audits information, inspection rates, it's going to be really hard to make a case if you have to point the finger at production issue as the sole cause of a defect. Like what are you going to say as the justification.

32:19
Daniel Scharff
Okay, so you probably know this question now is coming then. Like there is another Laura out there who works at a coman who also has this great relationship with you. And so when she is asking you what are the best things I should ask for in my contract with the brand, what is it that you're going to tell her? Is it just the same stuff that you just mentioned? Or if you're coman really what is the stuff that you want to absolutely get in there like you mentioned exclusivity. Is it all the same stuff that they're going to be trying to get in there for the contract to just work pretty well for them?

32:49
Daniella Carelli
I think a perfect customer for a coman is someone that has stable revenue stream for them. Right. Like there's really good forecasting that they're providing so there's no surprises on their end. Yes, you want flexible partnerships so if there's a need for excess demand they'll work with you. But at the same time if you can provide consistent forecasting, the product isn't as finicky maybe to make you know, that's definitely case by case assessment. That's their perfect partner because they know there's little risk on their end. They have a steady stream of whether it be commitments or just forecasting in a non mining manner. It's at least some insight into how they can plan on the operational side across multiple customers. That's what you want to give them.

33:32
Daniel Scharff
All right, that's a good answer. One thing I see with the brands at the early stage is like I believe every brand when they do a contract with a coman should have an expert looking at it. A legal expert hopefully. I mean maybe sometimes just someone who's so deep in ops consulting they can provide a lot of that. But brands in the channel sometimes are like hey, does anyone have a contract template for a coman? And like there are a lot of templates that we can offer as a community. That's a very tricky one because it's often so specific to the coman and there's so much that you really need to understand to do that contract the right way.

34:07
Daniel Scharff
Probably ChatGPT could do some stuff in there and you might really miss some absolutely critical things that a lawyer who has this experience is going to tell you. So Laura, I guess one question that I have for you is like my expectation is typically when it comes time to do the contract with the coman they're going to send over their template. It's probably like at least when I did this like, okay, a distributor would send over their template too. And it's like, great, here's our contract. And it is absolutely all of the most favorable things for them. Like, yes, if you ever leave us, you owe us 2,000 years of revenue. Like all the dream stuff that they would want in there. And then you kind of have to go through and redline all of it.

34:46
Daniel Scharff
Was that typically how it's gone for you or do you come in with Danielle and like, okay, here's our standard co main contract. Like how do you actually get to the point of the final agreement?

34:55
Laura Jakobsen
No, I think that is a really good point. So early in our days when we first started, we did work with Daniel actually to set a standard template, but it was a standard template of how we saw the sacred cows moving forward. Not that the expectation was obviously they were going to add stuff in there, but there's so many things that requirements that you should be putting in there and even KPIs for the co packer, like you have an SQF audit or whatever it is. But anyway, I think having that baseline, it shows them too that you're buttoned up, that they want to work with founders and early stage companies that have a baseline understanding of what they need to get out of the relationship. It shows competency, it shows partnership that you're coming with something.

35:44
Laura Jakobsen
I think we've had a lot of people, you know, work with our agreement as a baseline and then comment on that agreement. In some instances ours has been more robust than even their side what had it and it took in to consideration something and set expectations on something that maybe they struggled with before. So I think really having that legal advice to get you that right foundation to me is critical and I think especially early on, price is not the sole criteria for who's going to best to get into business price. Oh, they must be more efficient and they must have more business or there's a lot of stories you can tell yourself on why you're getting a better deal, but I think every founder owes it to themselves.

36:28
Laura Jakobsen
Just step back and really compare apples to apples across the different options that you have. Because even a co packer early on who's maybe $0.02 more expensive but is giving you a better indemnity clause or better payment terms, that's like a real tangible thing. Instance, you might have to pay for everything 30 days before you go into production. In another instance, you might have to pay 50% 15 days before production and the remaining 50% 15 or 30 days post production. Well, I take that deal way over, paying for everything up front, even if it cost me a cent more. Because you're also responsible for cash flow management and trying to make sure you're getting as much efficiency and cash flow. That's basically they're letting you borrow some money. So I think all those things are really important to take into consideration.

37:19
Laura Jakobsen
So just having the baseline agreement also helps you prioritize what's important to your brand before you even get something from the co packer. So if a co packer has asked us to use theirs as a baseline, then we basically just do a comparison. Like they all have the same section. So in this section, like what part are they missing that was in our baseline agreement? And so then you know what to insert. And it just helps every founder early on, like with their own education process on what they're going to need out of agreements as well. And it helps make the conversations with your legal partner more efficient too, because you're learning along the way, you kind of know where the gaps are. You can comment on the document and you can advance that conversation a lot faster.

38:04
Daniel Scharff
Danielle, is that your recommended approach? Do you see a lot of co mains are okay with that? Like, yes, the brand is going to create their template for what a standard co main contract looks like. And here's what it is. It sounds like in some instances, yeah, you might like, okay, we'll look at yours and we'll just compare it. But gosh, I like that approach. I don't know why it never even occurred to me to do as a brand, like, no, we'll just create ours. I think we just didn't have one, so we didn't know to go to them with something. So we just had to like figure out how to adapt theirs to hopefully as good of a scenario for us as we wanted. But is that the best practice?

38:35
Daniella Carelli
Yeah, it definitely goes a long way. Right. Like, to Laura's point, even if you don't end up using your exact form, it still gives you the roadmap and a baseline comparison of what of standards you expect to see in their form. And then you can really compare, see if it's apples to apples because it'll be pretty obvious if their agreement is literally only in their favor. I think it gives you a lot of clout going in. So yeah, it might be you incur some legal costs upfront, but in the long run it might be saving you a lot of back and forth and negotiations. It should be really bespoke. Like you mentioned, we're in the dawn of AI right, and ChatGPT replacing me in 10 years. But at the same time it's really a bespoke product specific agreement.

39:18
Daniella Carelli
It should reflect well, who's supplying materials. Is it more the brand doing all that procurement or is it more of a tolling relationship? So it's hard to really take another company's form and sort of apply it to your business because it might not really reflect the same synergies. And all those legal terms like the indemnity and the caps on liability, those all speak to each other and should directly relate to who's procuring materials and what the representations run to. Is it finished product specific or is it more about the R and D? Because they helped you create the specs. So it should be very tailored in terms of getting you the favorable terms and hopefully that long term partnership that you're seeking.

40:03
Daniel Scharff
I like that. Like a very detailed checklist anyways that you would have because you actually have not just the items but also the language about like. No. Well here's how we typically talk about that. Why are they talking about it differently? What does that mean? Okay, I like that.

40:14
Daniella Carelli
And it doesn't have to be 50 pages, it could be 10 pages, 20 pages, 5 pages. It really just comes down to what are the most important terms for your business, both from a practical perspective but also from a legal perspective.

40:29
Laura Jakobsen
And I think I would encourage people to have a packet. Like what we've developed over time, and I wish I knew this earlier on is we had the baseline agreement but there's also ways like that sets the expectation because I mentioned earlier the reporting is so important. So we have an attainment template, we have an inventory template, we have a pre and post production template for inventory and we present those templates and then if the co packer says oh well we're not going to do that, then it's like okay, great, show me yours. What's your version of this? Okay, that's acceptable. Or this piece of information is missing and if they don't have one like that's a real cue in too. So like oh, they're not used to reporting this kind of information.

41:12
Laura Jakobsen
So those are like the critical pieces that I would recommend is that baseline agreement to make sure that you know the expectations that you're going in with and then the baseline reporting mechanisms that you're looking to get from the co packer.

41:27
Daniel Scharff
And I think that site visit also can be really helpful when you're going through those kind of checklists with people. Because like no, I'VE seen how you do this though and like you should be able to do that because I've seen it or how come you can't? Because maybe I'll understand that based off what I actually saw at the facility, but maybe you could work towards that. I hope that most commands are also open to getting better on things like oh, you're asking for that additional reporting. Okay, yeah, that would actually be a good thing for us to have. We're going to do that, we're going to develop that because they do want to produce high quality products as well. So yeah, I love hearing that.

41:57
Daniel Scharff
Laura, I guess one question I want to ask which is it's sort of like in between a legal question and not is like okay, in my experience sometimes there'll be a product that comes off the line and like maybe it's like in spec and actually conforms to all the things that you've written down with them but there's something off about it and you're not like sure what it is or what happened but there's like some sort of variation from your standard and you are the one who needs to be there deciding is this in spec and are we going to release this product? But there are some times where it's just like not exactly 100% clear if you should, if you will, if you don't. Obviously that creates big problems with the comans.

42:34
Daniel Scharff
But you do want to have good consistent product that represents your brand always going out to the consumers. You must have been in a situation like this at some point.

42:41
Laura Jakobsen
Oh sure. Just stepping back, you said something that's really important and historically especially in the early days, like were at every run. So I think partly being there it makes everyone pay attention to we're making this product right now and we're bringing samples for them to taste and that there's a sensory approval component doing that early on. We've also trained people at the facility like what is that sensory component? So taste it with us. Here's what you're looking for and we've provided documentation like that taste curve, what it should be so that over time maybe you can transfer that knowledge. But to your point, there are times when something maybe it didn't taste right and the first go to would be can I see the batch card?

43:32
Laura Jakobsen
Is maybe somebody just forgot to put something in that's not going to impact brix and it's not going to impact ph or maybe they put the wrong amount. And we've seen in our early days where someone put in like a kilogram amount when it was supposed to be a pound amount. And so then you have to add more of everything because there was a misstep. So I think that real, just analog auditing of, like, literally what's in the recipe, what did you put in, is a really good place to start. And then I think also we're in a situation where our whole entrepreneurial life, we've dealt with fresh product in nature. And sometimes there is variability in nature. And you as a brand have to understand, like, what is that variability acceptance. And maybe that brick range and PH range helps you define that.

44:24
Laura Jakobsen
But I think understanding, like, when is it that it's off? Because maybe consistency isn't achievable to the degree that you're thinking. But, like, is a regular consumer going to taste the difference is something you have to evaluate. So I think both things can be true. Sometimes we're oversensitive because we created the thing and we're just like, it's not exactly right. And sometimes, like, something did go wrong. And that's where, like, that partnership and access to information becomes really critical. And you kind of gotta go through the components. But I think the goal is being there early and making sure that you are getting to a point of consistency where you have X amount of runs, where it was like, whoa, man, we hit it every time. And then, you know, like, you scaled it appropriately.

45:08
Laura Jakobsen
You move from benchtop to a small run, you move from a small run to a larger run, and you just continue to get that consistency. Then you can kind of put your guard down a little bit.

45:19
Daniel Scharff
That brings me back. I like it. All right, so last question for each of you. So, Laura, I'll start with you, which is, yeah, if you were going back and doing this again, I mean, I think sounds like you had the right help going in, which I don't feel like I had exactly that knowledge to, like, go and get that help. Probably we could have avoided some mishaps if we had, but there probably is something around, like, the command, due diligence and selection kind of ramp up with them that, like, yeah, okay, we did it well. But here is one thing that I wish I'd done a little differently. Anything that immediately comes to mind.

45:51
Laura Jakobsen
A couple of things. I think the first thing is, were we lucky that we had a legal partner in Daniel who understood the business side of things? So I think, like, as an early startup, you do have to be anchored in reality. And I think having legal counsel that understands that reality and has worked with startups before and like, hey, like let it go. It's not that big of a deal. Or can help assess the risk. The business risk of the what you're agreeing to or not agreeing to is just probably the most important. And I feel like were gifted that somehow. And I hope everybody finds that in their business partnership, in their legal partner that is just such a critical thing. And I think the second thing is basically I learned through experience just how important the reporting part is.

46:45
Laura Jakobsen
And I think to me one of the critical things that nobody thinks about, and we haven't talked about it yet, but is yield loss. So if you don't have that information, access to information to understand literally like what's going in the tank and what came out of the tank and what's the yield loss and we all agree to yield loss in agreements. But like how do you truly measure it on the back end? That's a real cash flow metric because every early founder has to make money from what they're buying. There's like, you can't just let it go down the drain, so to speak.

47:19
Daniel Scharff
So I think literally in this case,.

47:22
Laura Jakobsen
Making sure you have the information rights, those types of information, but that being a critical one too that we haven't talked about, it's just so important. So I think those are things we built over time, the types of reporting, understanding of yield loss, like those are critical in the beginning to get a hold of not just what you're expecting, but how do you track it.

47:42
Daniel Scharff
That is a super pro insight and I am sure that you have learned that one the hard way. It sounds like in some instances. Okay, Daniel, just to wrap us up here, I know we've talked about a lot of stuff here today, but any just kind of final words of advice for earlier stage entrepreneurs, whatever kind of command due diligence that they're doing, anything that we didn't cover here or anything, just like, please, I hope you will really just keep this one principle in mind as you're going about your due diligence here.

48:08
Daniella Carelli
Yeah, I mean I think ask the hard questions. You might be starstruck at the opportunity to work with a big manufacturer that has a beautiful facility. How will you prioritize me as a small startup, like make them explain why you should partner with them. It's a two way street and flexibility should be on both ends, not just the manufacturer, but like Laura said, on your expectations as well. But really understanding what you're going, what you're getting into so that there are no surprises because I feel like that's the hardest thing for founders to overcome is not necessarily like, oh, there is a defect. How do we resolve it? It's just, oh, I didn't know that's what the deal was. I didn't know that they could do that.

48:48
Daniella Carelli
And making sure you do that diligence earlier at least saves you the surprise and the shock value when we have to talk about how to fix it.

48:56
Daniel Scharff
All right, I love it. I really appreciate all these insights and again, it's been super fun for me to get to relive my beverage day with both of you remembering the good and the bad of a lot of it. Because the co man part is, I would say that can be the highest anxiety part. There's nothing that can just change how your week is going then something that happens at the co man. So really appreciate both of you sharing all of this experience that you have. Laura, congrats so much on all of the excellent momentum and accomplishments that you guys have as a brand. And I hope everybody also is like pals with their lawyer the way that you guys are. It seems like a really nice relationship and one where you can really lean on your legal counsel.

49:36
Daniel Scharff
So I'm really glad that you have such a good relationship there. So thank you both so much. I hope this has been just as interesting for everybody else out there listening to it. So thanks again. Bye everyone.

49:47
Daniella Carelli
Take care.

49:50
Daniel Scharff
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.