Enrico Schaefer - May 24, 2019 - Consumer Packaged Goods
Highlights of this Tech Law Podcast from CPG attorney Lorrie Orton Heath:
[Start of recorded material]
Enrico Schaefer: Welcome to the Tech Law Podcast. My name is Attorney Enrico Schaefer. I specialize in technology company representation. And today on the show we’ve got a special guest, Lorrie Orton Heath. Lorrie. Lorrie is a counsel to Traverse Legal and specializes in corporate and technology law issues. And today she’s going to be helping us understand a little bit about the CPG industry and the different types of legal issues that CPG companies should be thinking about as they go from idea to startup to early-stage funding, and hopefully to two hundred million dollars in revenue.
So welcome to the show, Lorrie.
Lorrie Orton Heath: Hi, Enrico. Thank you.
Enrico Schaefer: Lorrie, why don’t you just give us a little bit of your background and expertise before we jump in here and start learning a little bit about CPG?
Lorrie Orton Heath: Sure. Currently, as you mentioned, I’m a CPG attorney, and I work with a lot of different startup companies. Some of them are further down the road than others. But prior to becoming an attorney, I actually worked for Nestle USA. And during that time, I was in sales and marketing. And I had the really great, great good fortune to start out actually as a sales representative in Houston, Texas. And then I ended up moving into some other more kind of sophisticated responsibilities, and that included directing a national headquarter operations for major wholesalers and retailers in Texas. And some of those are Albertsons, HEB, Kroger, some that you may recognize the name or some of the listeners may recognize.
I also managed a re — — offices for Nestle, and that included managing full- and part-time sales teams. So I was able to leverage that business experience with Nestle, and I moved into the medical device space with a company called Boston Scientific. And then from there, I went on to work for other companies such as GE Healthcare and St. Jude Medical, and also some smaller startup medical device companies.
Over the course of that time, I was in Minnesota working for a medical technology company called St. Jude Medical and I decided to go to law school. And that’s when I became an attorney. And so I’ve been very lucky to be able to kind of merge my technical business experience with being an attorney. And I’m also able to rely on that retail experience that I really honed initially with Nestle to advise clients that are looking for attorneys who specialize in CPG. So it’s been a good kind of experience for me and it’s led me to this.
Enrico Schaefer: Perfect. And you know at Traverse Legal, we really love to bring in resources, attorneys, paralegals who have a specialized background and are also an attorney, also a lawyer because, for the clients that are in these different spaces, whether it’s open source software licensing or whatever, to actually have someone who writes code in open source or to have someone who’s got a lot of experience in consumer packaged goods already is invaluable to clients. It turns out that you speak their language. You actually have a really good insight into the business model itself. And so you’re not just there to analyze legal issues.
So let’s talk a little bit about consumer packaged goods, also known as CPG. I’ve seen numbers, Lorrie, of industry worth trillions of dollars. What is CPG from your point of view, and what does that market look like?
Lorrie Orton Heath: CPG means a lot of different things to different people. For just the initial sort of definition of it, CPG stands for consumer packaged goods, which doesn’t sound as cool as saying CPG. So we’ll say CPG, I guess, for the purposes of our talk today. But most people, when they think of CPG, they think, well, what does that include? And for the average consumer, if you walk into your local store — maybe it’s Whole Foods or Target or Walmart, really anything that would be in a major retailer such as those types of stores would be a CPG product.
You’ve got food and beverages, cereal, flavored waters. You’ve got beauty and personal healthcare items like shampoos and shaving creams. And you also have household products like dishwasher detergent and furniture polish. So it’s a —
Enrico Schaefer: Where you really specialize is getting the companies from idea and startup into these big box stores, into the mainstream of consumer goods.
Lorrie Orton Heath: Yeah, that’s right. And so a lot of times, most early-stage CPG companies, it starts with an idea. And maybe it’s a founder or more than — there’re maybe a couple of founders. And oftentimes, I’ll work with people who maybe came up with a recipe, and it’s a recipe maybe that was passed down to them in their family. And they’ve started to make it for friends and family, that particular recipe, and maybe they’re making it in their own kitchen.
And they start to get traction with that, and they think, “Well, gosh, this is really good and I’m getting great feedback from people on it and they love it. So could this be a product I could put in a store?” And from there, they — it’s figuring out how to do that. And it’s not necessarily a straight line. I mean, there’re lots of things that come into it. One would think getting it in a store might be sort of — if it’s a great product and people want to use it, that it would be easy to do. But that’s not necessarily true.
So there’re lots of things that CPG companies can do to help leverage their good product into stores. And really, networking is one of the main things that can help them do that. But there’re other things that they can do as well.
Enrico Schaefer: Yeah, and it’s interesting because you and I see it all the time because we work with so many startup and early-stage companies. There are a lot of great ideas, great products, maybe the best product its class ever. But they never make it, right? because you’ve got all the business side issues. You’ve got the funding issues. You’ve got to make sure that you get all of the different seats filled with the expertise that you need across the board from professional services – lawyers, accountants, on down to the sales and marketing and product development. So there’s a lot of pieces to the puzzle.
Talk a little bit about how a CPG company, an early-stage or an idea company is going to typically get funded and grow.
Lorrie Orton Heath: So a lot of times these companies will start out, and maybe the founder or the founders have some money. And they’re typically going to — the chance that they may come upon an investor that will invest in the company or a rich uncle or aunt, that can happen, but it’s not typical. And so a lot of times these early companies will have one of the founders or both of the founders will actually leave — if they’re going to make a really big step into their business, their going to leave their day-to-day job, or one of the founders will stay in the day-to-day job and the other one will commit the time to the business, while the one in the day-to-day job is funding what needs to be done.
And so they’re using a lot of their own money. They’re establishing credit lines on behalf of the company. And oftentimes, friends and family will come in and they’ll pitch in and provide money or credit lines. I think it’s important to mention here that friends and family are often very helpful to early-stage CPG companies, but it’s very important to find an attorney who specializes in early-stage companies, whether they are as a CPG attorney or just a business attorney who specializes with small companies, who helps them document any provision of money that may be given to the company because you want to protect the parties.
You want to protect the founders. You want to protect the person that’s loaning the money. And you also want to protect the business. You don’t want, down the road, to have Emily who founded the company and Uncle Joe gave her 10,000 dollars, five years from now you don’t want there to be a misunderstanding where Uncle Joe thinks he has a stake in the business and Emily doesn’t believe Uncle Joe has that stake. And that can be a potential problem later with investors that come along who want to understand who actually owns part of the business.
So getting a good attorney who specializes in CPG or in business matters can help you document that.
Enrico Schaefer: Lorrie, it’s really been fascinating to me through the years to watch these different types of companies grow. And I tend to put companies into two boxes. The first is the napkin business people, right? They’re going to grow out a revenue. They’re self-funding. They can do everything on a napkin. And you know what? It tends to work. As problems come up, they solve them.
The napkin approach doesn’t work for anyone that’s going to be taking in money, or especially multiple rounds of money because whoever’s coming in second is going to want to see all of the corporate documents. They’re going to demand that they be lined up, that everyone — that all the prior money that’s come in, that all of that’s defined by contract, that non-competes exist with all the right employees. And they’re going to do due diligence and they’re going to do a risk assessment before they put that money in.
So you’re building a foundation of documents that you can then build upon as you go through the different financing rounds. What have you seen in that regard?
Lorrie Orton Heath: That’s a really good point, and everything you said is exactly how it should happen. And it’s very typical for the early-stage believers in the company who want to invest, whether they be family or friends. Typically, we don’t see so much where they’re asking who’s already in the company. Sometimes they’re the very first people besides the founders who have put money in. But when you start moving up to angel investors and onto other groups of more I’ll call them sophisticated investors.
They’re going to want to do exactly what you just said, which is their due diligence. They’re going to want to see who’s already invested in the company, what their stake is in the company. They’re also going to want to see what risks the company has taken. What are their relationships? Do they have employees? Are they independent contractors? Are there non-competes in place? I mean, if there’s a secret sauce recipe, is that being protected so that that can’t be taken and used in another way that’s not connected with the company?
And all that ties in — and we can talk about that as well — but all that ties in to protecting your brand equity. And I would suggest here that it’s important to also tie this in not only with a good business attorney or CPG attorney, but also with a good intellectual property attorney, someone that can help you protect that brand equity with a name or slogan or logo or all the different things that you’ve built around your brand.
Enrico Schaefer: It’s so funny that the conversations you have with some of these founders and inventors and these idea people as they get through the various stages of growth, how much different is it, in your experience, in working with companies who actually lined everything right at the beginning versus having to clean them up later once there’s a 10-million-dollar round coming down the pipe?
Lorrie Orton Heath: That is a really good point, and the short answer is it makes a huge difference because sometimes there’re investors that will come in and they like a company, they like the founders, they like the products, but they don’t see good documentation. And it doesn’t mean they don’t trust the founders or believe in the product. To put it kind of in a short statement, it may be as much as their saying this is too big of a hassle. They’re other companies we can invest in. We may not like the founders as much, but they’ve really got their ducks in a row. This is going to make it easy for our investors to want to put their arms around this. They’re going to want to put the money in. We can get this transaction done quickly.
And so sometimes the documentation can help kind of put the bow on the package when you’ve got everything else going right. You’ve got good founders. You’ve got people that believe in the product. You’ve got a great product. Consumers love the product. But you’ve just got to get the bow on the package with the documentation and get that in order. And that can make the difference between a deal going through and not.
Enrico Schaefer: And one of the things that these companies sometimes fail to appreciate is there’s always some cleanup at a funding round, right? But that is time away from doing what you really want and need to be doing, which is growing your company and working on distribution problems and retail problems and packaging problems and [IP] problems. And you really get diverted when you have to go through a funding round on the things that the people who are bringing the money want to see done.
And so it really can become a time suck and a distraction. And you don’t really know whether they’re going to put the money in until you get everything cleaned up. So you’re always making that decision as to am I going to devote the time and resources to get all these documents together in order to pursue this potential investment round, or am I going to work on my business and try to drive revenue?
If you’ve got everything set up as a foundation from the beginning and all the prior angel investors know exactly what their rights are and it’s all documented, no one’s fighting about it later and using it as leverage, you’re just in such a better position to take it to that next funding round.
Lorrie Orton Heath: That’s exactly right. And I think for purposes of the founders themselves, oftentimes, if you’ve got a really good team of founders, or at least one founder who then brings on a friend or someone else that maybe perhaps is performing the function of a business manager, you can divide up those tasks. And perhaps one founder is more the face of the company where they get out, they meet investors, they go to trade shows, they set up booths and sell products at big events or at county fairs or a farmers’ market, that type of thing.
And then you have the other one who’s keeping the ducks in a row, who’s managing the funds as they come in, and they’re controlling the expenses. They know how they’re spending the money. They know what their production costs are going to be. They know what they are today and what they’re going to be in six months. And so they’ve got a good system going and they’ve got a good team. And to me, those are usually the companies that do very well because they’ve got sort of a — not only this agreement in place, whether that’s documented or not, but it’s just an understanding between the two where they’re going to function in a certain way, and that’s going to be the best for the business. And if often works well.
Enrico Schaefer: One of the fascinating things to me, Lorrie, is in your space. So I — as you know, I’m more in the intellectual property and the trademark space. I do a lot of litigation, but I also help companies who are in the tech area grow. I don’t do the same type of corporate work that you do, so I’m not setting up all the documents in order to take in this investment money, et cetera. So you’ve got that area of specialization for your clients.
But what I find fascinating is it’s different in consumer packaged goods than it is for a software development company or for a service company that’s going to be offering software as a service, right? Here we’re talking about tangible goods, consumer packaged goods. What kind of unique issues do CPG companies face in your experience that they need to be thinking about from the beginning?
Lorrie Orton Heath: Well, that’s a really good question because we are talking about tangible goods, and we’re talking about products that you make in a kitchen that over time, perhaps, you get some funding or you get a credit line, and now you’re working in a commercial kitchen. Well, now you’ve got production going and you’re becoming more sophisticated. Well, there’re risks associated with that production. You’ve now got to or you should put in an agreement in place in a contract form with this commercial kitchen. Anybody that’s touching the ingredients that are going to make your product, you should have an agreement in place to protect not only the recipe for your product but protect really the parties, both parties, so you understand the responsibilities of both parties.
And so you’ve got risks not only in production, but you’ve got the risks really through the whole line of the process of the product being produced, commercialized — say, for example, in the commercial kitchen space that we talked about, and then taking that product and actually putting it on a shelf at a retailer. And then the next, of course, it’s certainly not a problem — it’s a happy occurrence when the consumer picks up your product and buys it and takes it home.
You’ve got to make sure that your product is risk-free and that that consumer is going to purchase your product, use your product, and enjoy your product without having anything bad happen. And so that’s a really — can be a real risk and problem for CPG companies where they’ve got products that have shelf lives. You’ve got to manage the shelf life of the product. When does the product expire? When do you want to take it off the shelf so the consumer doesn’t purchase it and have something that potentially could be a bad product?
You’ve obviously not producing good products to make the American consumer sick. So you’ve got to — you’ve got to really be aware of the risks all along the line. And it’s not only production — manufacturing but production, and then also ultimately retail, and then ultimately into the consumers’ hands.
Enrico Schaefer: What is it that you’ve seen, Lorrie, in your experience as a commercial attorney, as a commercial attorney that really has a lot of experience in CPG? What is it that you bring to the table based on your experience that you think really makes a difference for clients?
Lorrie Orton Heath: I think the biggest difference — and we talked about this a little bit earlier — is from the days that I worked for Nestle Foods, having a good understanding of what makes a quality product and getting that product in front of the American consumer and how you go about doing that, that in itself is not something that’s easy to do. I had, like I said, the good fortune of working for a major corporation and manufacturer. So at some level, you have some entry to retailers because they know who you are.
So the challenge for a good — a CPG company that’s starting out and good CPG companies is really being smart about how they market their product and getting it into retailers. And a lot of the really good smart CPG companies, even the small ones, know how to begin marketing their product through social media. So I can speak to the social media portion of it. I can speak to the challenge of getting in front of a retailer.
And then I can speak to the risks associated with the product as an attorney and how you want to document and protect your company and yourself, and then also how you want to protect your product not only for your sake but also for the sake of the consumer that’s going to buy your product. So really, all of those different considerations are something that I’ve had experience in, and it’s something that I can communicate with and share with clients when I meet with them and talk through all the different aspects of it.
Enrico Schaefer: Well, and one of the things that I see in every niche in today’s evolving world, with all these different innovations that just keep coming at us, is that if you’re a client and you’re a CPG startup and you’ve got this great product an