Tag: startups

Entrepreneurs Beware: Violating Food Safety Laws Can Land You in Jail

Posted on by Patrick Morin

I frequently receive calls from food startups who want to know the best way to protect their business from their competition. Specifically they’re concerned about theft of their recipes, intellectual property and key employees. After listening to their concerns, I then pose a question to them: what steps have you taken to protect your business from a food safety incident? More often than not there is silence on the other end of the phone. What I attempt to explain to them is that, regardless of all their other legal concerns, without a comprehensive food safety program in place their business will be worthless. Some listen, others don’t. But many of these entrepreneurs don’t realize is that, while they may think they’re in the food business, they’re actually in the food safety business.

The food industry is unlike any other. When a software company’s product is defective or a financial services company provides poor advice the worst thing that may happen is customers lose money. But unlike these industries, when a food business introduces an adulterated product into commerce consumers may become seriously ill, possibly resulting in death. Now I get many startups are “bootstrapping” their business and capital is tight, so careful decisions must be made where to spend and where to cut corners. While you may want everyone of your witty and artfully crafted slogans trademarked, if by doing so you’re foregoing having your product labels reviewed for FDA compliance or engaging a food safety professional to assist in designing and implementing good manufacturing principals, then you’re setting yourself up for failure.

If you don’t believe me, let’s take a look at a few recent examples. A licensed maple syrup producer decided to expand his business by using the apples picked from his farm to make and sell cider. This all seemed harmless until the cider was linked to an E.coli outbreak that sickened four people, including two children. The court found that the owner failed to follow good manufacturing processes and he was convicted of selling adulterated food, sentencing him to 14 to 48 months in prison.

In another incident, a woman plead no-contest to charges that she sold adulterated and misbranded food at several Michigan farmers markets. She sold various pickled products directly to consumers, which under Michigan law requires certain processes to take place during the production cycle to prevent the risk of botulism. Additionally, under federal law all food processors who make low acid and acidified foods must register their establishment. Here, the woman produced the products out of her home kitchen, not a registered facility, and she apparently didn’t even know there are laws regarding the manufacturing of food products which are intended to protect consumer health. These mistakes cost her not only $3,100 in fines and 11 months of probation, but her business.

For food startup businesses, making sure your products and food safety procedures are in compliance up front will save you countless headaches, and potentially money, down the road.  If there is on piece of parting advice I can give food entrepreneurs out there it’s this: you will make many mistakes running your business, but most likely the business will continue to survive and you’ll learn from these mistakes; however, it only takes one food safety incident to destroy a business. If you don’t believe me, take a look at Blue Bell ice cream and Chipotle. Whether their businesses will survive these outbreaks or not remains unclear.

Salad Grown Locally: Investment Opportunity or False Hope

Posted on by Patrick Morin

All food is local…that is unless you live in Chicago and want a salad in the middle of January. In this case the lettuce in your salad (and the majority of the other ingredients) is most likely grown in Mexico or California and shipped to your local grocery store. However, a few entrepreneurs are trying to change the produce supply chain by growing green, leafy vegetables on a commercial scale in some unlikely places.

As reported in articles last week by Wall Street Journal and Eater.com, rooftop greenhouse facilities have sprouted up in cities across the United States, including New York City and Chicago. These businesses seek to provide consumers with fresh produce that is available in stores within a few hours of harvest, reducing the amount of waste due to spoilage. They also aim to price their products comparably to existing brands since their transportation costs are significantly less as shipping is usually only a short trip across town. Reducing transportation use would also result in a positive environmental impact, which is another one of their goals.

Some urban farms have caught the attention of investors who have contributed millions of dollars in hope of success. But apparently, not all urban farms are created equal.  Some, including BrightFarms Inc. and FarmedHere LLC, have cancelled plans to open farms or shut down operations after only a few months in business. However others, like Gotham Greens Farms LLC (which has raised $30 million from investors) and AeroFarms LLC (which has raised $70 million in corporate and project financing), appear to be on track for success.

While it is not clear whether these business models will prove to be long-term successes, potential investors should be familiar with the potential roadblocks that can make or break urban farming businesses. First (and foremost) is cost. Rooftop greenhouses are extremely expensive, upwards of 20% more than a traditional greenhouse. Also, permitting times will increase because “farming” is normally not a permitted use in urban centers and would require a zoning variance. In addition to local laws, growers may be subject to the recently published Produce Safety rule promulgated under the Food Safety Modernization Act, which establishes science-based minimum standards for the safe growing, harvesting, packing and holding of fruits and vegetables. It is important businesses prepare for the implementation of, and the steps required for their business to comply with, the Produce Safety rule.

Investing in agriculture, just as with any other type of investment, requires competent and thorough due diligence. While the investment may look good on paper, investors should remember the saying made famous by President Ronald Reagan: “trust, but verify.”

Leasing “Bootcamp” for Startups

Posted on by Patrick Morin

You’ve finally made the decision to leave coffee shops behind and rent office space. You begin searching online, maybe even find a few places you like. You contact the listing broker and make an appointment to tour the space. It’s perfect for your business. The broker tells you the market is hot and you need to move fast (FYI, they always say that!). By the time you get home you find an email from the broker sitting in your inbox with a overwhelming 30 page lease attached. The broker says “don’t worry it’s a “standard” lease and fair to both parties, besides the only important part is the term and rent.” While this is your first foray into commercial real estate, you wonder why then do we need the other 29 pages? The answer is because commercial leases are binding legal documents that outline your responsibilities and protect your rights, and, most importantly, they can have a substantial impact your business going forward.

Whether you’re “office sharing” or entering into a more traditional leasing arrangement, there are five things to focus on:

  1. Letter of intent (“LOI”). This document is exchanged up front, and lays out the general terms to be incorporated into the lease. Many brokers will insist on skipping this step and go right to the lease, but if the landlord hasn’t agreed on the basic business terms you’re wasting time and money presenting him a formal lease. The LOI makes sure everyone is on the same page before drafting the lease, thus saving you unnecessary legal fees. The broker will usually prepare the LOI, but before you sign it make sure it says that it is a non‐binding expression of interest, and not a binding contract. Bottom line, make sure what is in there is what you want from a business perspective (i.e., rent, build‐out, security deposit, type of use, access, kitchen, pets, bicycles, ect.).
  2. Insurance and Indemnity. Allocation of the risk is an important concept in leases that determines which party bears the responsibility to respond to risk when something occurs in the leased space or building. Your ability as a small business to respond to the risk is satisfied by obtaining insurance coverage. Work with an insurance agent to review the insurance requirements in the lease, and, unless you have a prior relationship with the agent, make sure to obtain several quotes as prices many vary significantly. Included in leases are long provisions where the tenant indemnifies the landlord if certain events occur (i.e., tenant assumes the risk whether or not caused by tenant). As your company grows, indemnity provisions can be negotiated—but for a startup “it is what it is”—so insurance is critical.
  3. Assignment and Subletting. Your name is going on the lease, so you are ultimately responsible. If plan on sharing the space with others, make certain to discuss this in advance with the landlord, as many leases will contain a default provision if you try to assign or sublet the space without the landlord’s permission. For businesses that expect to grow through new or additional rounds of financing, this provision is particularly important because these could trigger a “change in control” of the ownership of your company which could lead to a default under the lease. Make sure to discuss this possibility as well.
  4. Personal Guaranties. Startup tenants may have a difficult time negotiating a lease that doesn’t include a personal guarantee; however, you may be able to negotiate to limit the scope or impact of such guarantee. There are several ways to accomplish this (see Negotiating Personal Guarantees in Commercial Leases), so it is important to discuss these options with your attorney.
  5. Tenant Improvements. It is extremely important to understand how the space will be built out, including electrical, HVAC and data/voice. While some tenants may want to control of this process, in the long run it’s better to have the landlord perform the work (at landlord’s cost). You have your own business to run, so let the landlord deal with construction delays and legal compliance issues. This after all is their expertise, not yours.

Rent in commercial leases usually has three components and you should get familiar with these as they go directly to the bottom line:

  • Base Rent. This is the base amount you are paying for occupying the space.
  • Additional Rent. The amount that is based on your percentage share of expenses incurred by landlord in owning and managing the building. These expenses can vary based upon what services are included as landlord’s operating expenses, so it is important to review this list.
  • Tenant Expenses. The lease may require tenant to pay service providers directly for certain services instead of reimbursing landlord as part of additional rent. For example, this can be janitorial services within the leased space, separately metered electrical, and taxes on your personal property.

Negotiating commercial leases involves a wide array of terms and options. If you need assistance in negotiating your commercial lease, please contact the attorneys at Morsel Law.