Darren Gleeman, Managing Partner at MBO Ventures – Interview Series

Although cannabis has become a multi-billion dollar industry employing hundreds of thousands of Americans, the legal industry still faces a multitude of significant tax-related issues. Many of these costly issues can be directly sourced from one specific IRC Tax Code, among hundreds of others, 280E. This particular tax code causes widespread issues that cause legal and licensed cannabis businesses to pay exorbitant amounts in taxes that other industries don’t have to pay. For a better understanding of this problematic tax code and its present-day impacts on the American cannabis industry and to discuss the importance and potential of ESOP’s (employee stock ownership) plans for the industry, mycannabis.com once again has the pleasure of speaking with Darren Gleeman, Managing Partner at MBO Ventures.

How did you first become involved in finance, and what subjects did you study at university that properly prepared you to work in such an exciting field?

I studied finance at Wharton where I learned the fundamentals of quantitative modeling and the scientific method. My first deep dive into finance was founding a firm that removed human emotion from trading, transitioning into one of the first high-frequency trading platforms in the world. We traded over 1% of all U.S. equities daily, which gave me an unparalleled understanding of markets, liquidity, and valuation.

Prior to becoming a Managing Partner at MBO Ventures, what positions did you hold in finance/trading, and what were the regular duties of those roles?

Back in 1995, I founded an internet start-up, e-Coupons. After that glowing failure, I began my career in trading stocks. After a couple of years, I started two hedge funds that traded stocks based on tiny misvaluations in the stock market. I was the Managing Partner for both, GMD Trading and GB Trading. At both GMD and GB, I focused on developing algorithmic trading strategies, leveraging technology to optimize execution speed and efficiency. My primary role was to ensure capital allocation was optimized, risk was managed effectively, and new market opportunities were identified.

In your angel investing experience, what have been some of the most worthwhile investments that you made, and why do you feel that those investments were incredibly important?

Angel investments in companies like Screaming Media (NASDAQ: SCRM) and Blackboard (NASDAQ: BBBB) were significant because they capitalized on shifts in technology and digital infrastructure. More recently, investments in Class.com and Accelerant Manufacturing are exciting because they’re innovating in education and industrial automation—two industries with significant growth potential. The key to a great investment is finding companies solving real pain points at the right time.

What led to you joining MBO Ventures, and what are your regular duties with the firm?

I co-founded MBO Ventures because I saw a major gap—business owners were selling to private equity without fully understanding the financial advantages of an ESOP. This is a better alternative to private equity for both sellers and employees, yet almost no one understands it. With an ESOP, owners make more money after tax, employees become owners at no cost to them, and the company continues to operate tax-free. My role is to structure ESOP transactions, educate owners on their options, and invest capital alongside them when it makes sense.

What is an ESOP and what are both the benefits and disadvantages of that plan? Would ESOPs be advantageous to cannabis businesses, or would they be preferable for other industries?

An ESOP is just another way to sell a company—but with huge tax advantages for both the company and the owner. It’s a government-backed structure that allows business owners to sell their company to employees using pre-tax dollars while deferring capital gains.

Advantages:

• The company, if 100% ESOP-owned, pays zero federal and state income taxes.
• Owners make more money after tax compared to selling to private equity.
• Owners can still manage the company and retain financial upside.
• Employees become owners at no cost to them, creating stronger retention and performance.

Cannabis businesses benefit tremendously because an ESOP eliminates the tax burden from IRC 280E, which prevents cannabis companies from deducting expenses. This makes ESOPs uniquely valuable in cannabis, where traditional tax structures crush profitability.

Disadvantages:

An ESOP is a viable exit strategy, but if a company does not already have strong leadership in place, the owner may need to stay on temporarily until a capable management team is established. Unlike private equity, which will immediately hire replacements, an ESOP does not provide an automatic transition plan. However, as long as the owner is willing to remain involved during the transition, the company can successfully shift to employee ownership.

Private equity takes a different approach—most often removing the C-suite, reducing headcount, and implementing cost-cutting measures to maximize returns. An ESOP, by contrast, protects jobs, maintains company culture, and allows for a more stable transition.

An ESOP also requires ongoing administration. Every year, the company must conduct a valuation to determine the fair market value of its stock. Shares need to be allocated to employees, and regulatory compliance must be maintained.

These responsibilities are typically outsourced to third-party administrators, trustees, and valuation firms. The cost of managing an ESOP can range from $25,000 to $100,000 per year, depending on the company’s size and number of employees. While this is an added expense, it is often offset by the significant tax savings an ESOP provides.

When was Tax Code IRC 280E implemented and how have you seen it impact cannabis businesses? How much more expensive are taxes for cannabis businesses since usual deductions can’t be declared?

280E was enacted in 1982 to prevent drug traffickers from deducting business expenses. It wasn’t intended for state-legal cannabis companies, but they’re caught in it. The result? Cannabis businesses often pay effective tax rates between 60% – 70% or more—far higher than any other industry.

What is the “No Deductions for Marijuana Businesses Act,” and how would that continue to negatively affect legal cannabis companies while keeping the illegal market open?

The “No Deductions for Marijuana Businesses Act” is a proposed bill that would reinforce IRC 280E, ensuring that even if cannabis is rescheduled to Schedule III, state-legal cannabis businesses would still be barred from deducting ordinary business expenses like rent, payroll, and marketing. This means rescheduling alone would not provide the tax relief many operators have been anticipating.

For cannabis operators, this bill would solidify the status quo—they would continue paying some of the highest effective tax rates of any industry due to 280E restrictions. Many have held out hope that rescheduling to Schedule III would finally allow them to deduct normal business expenses, easing their tax burden. If this bill passes, that hope is gone, and cannabis businesses will remain at a major financial disadvantage

For investors, this bill creates even more uncertainty in an already volatile industry. Federal policy would continue to restrict financial viability, making institutional capital even more hesitant to enter the space. Without access to traditional financing and relief from 280E, the legal market will struggle while illicit operators continue to flourish, tax-free.

If a federal rescheduling from Schedule I to Schedule III were to occur and the aforementioned tax act was not to pass, how would that change the substantial cost of the taxes of legal cannabis businesses? Would no longer being listed as Schedule I be a widely beneficial move for the cannabis industry?

It’s not a huge win, but it would be a start. Rescheduling to Schedule III would eliminate 280E, allowing cannabis businesses to deduct ordinary expenses like payroll and rent. This would bring the average effective tax rate down to between 40%-50%, depending on state, which is still high but would then be in line with what other industries pay.

While this would significantly improve profitability, rescheduling alone wouldn’t fix everything. Banking restrictions would remain, as rescheduling doesn’t legalize cannabis at the federal level. Businesses would still struggle with access to capital, interstate commerce would remain off-limits, and regulatory uncertainty would persist. It’s a step in the right direction, but far from a complete solution.

Thank you for joining us, Darren! For more information on MBO Ventures, please visit its website.