To address some of the most pressing questions we hear from food entrepreneurs, we turned to our trusted longtime partners at Foster Garvey PC. With the assistance of legal experts Hillary Hughes and Ralph Simmons, we explored critical topics such as fundraising (agreements, convertible notes, SAFEs, and equity), scaling production through co-packer and distributor agreements, and navigating risks like mislabeling, misbranding, and Prop 65 claims. Their insights offer practical guidance to help food businesses overcome challenges and unlock new growth opportunities in 2025 and beyond!

Read on for highlights from our discussion—and don’t hesitate to reach out if you have additional questions or would like to be connected with Hillary or Ralph. This interview has been edited for clarity. This article is made possible by the support of our partners Foster Garvey PC and the Rhode Island Minority Business Accelerator, a program of the Rhode Island Commerce Corporation.

What’s the difference between a convertible note, a Simple Agreement for Future Equity (SAFE), and equity financing?

SAFEs and convertible notes are similar, in that they are both “convertible” instruments. They start as something that looks like a loan or debt, and they later convert into equity - such as stock or units/membership interests in an LLC. It costs less and is faster to do a SAFE or a convertible note than a priced round or equity offering.

One of the main benefits of SAFEs is that you don't have to wrestle with how much the company is worth at the time of the investment, which is always tough for early-stage businesses. You can push the question of valuation down the road until you're raising a larger amount of capital in a priced round or equity financing. A SAFE is supposed to be lean, mean, easy, fast, and cheap.

A convertible note, which usually involves a “Note Purchase Agreement,” is more robust and has an actual due date or “maturity date” (usually 12-36 months). Contrastingly, SAFEs convert when and if the company raises a larger equity financing round. Investors often feel more comfortable with a convertible note, because it has a maturity date. It is also carried on the books as debt, which means it stands in line ahead of equity holders in the event of insolvency, and, while uncommon, the investor could request that the note be a “secured note”, which means the investor can place a lien on the company's assets if necessary, like a traditional bank loan.

Are you seeing side letters or terms adjusted on the SAFE to make it closer to a convertible note? Are the two being blended?

We are seeing investors ask for side letters, which include special privileges or carve out additional rights. We try to discourage it on SAFEs, because the whole purpose is to streamline the speed and reduce cost and required paperwork.

The decision on whether to give a side letter is a product of bargaining power and how much demand there is to invest in your business. If your business is a hot commodity and everybody wants in, then you have more leverage to say, "We're not issuing side letters at this stage.”’ If, on the other hand, you've been trying to raise capital for a long time, and there's not a lot of interest, then sometimes you have to offer additional rights or privileges to attract an investor.

You're touching on another question around this topic, which is: how do fundraising options impact company control and ownership structure?

One of the negotiating points to consider when talking about control with an investor is how long those control mechanisms last. Do they last forever? Do they last until the next round? Do they last for as long as that investor holds a certain amount of equity? Founder leverage in these negotiations generally comes down to how much interest there is from investors.

Keep in mind that with each subsequent round of financing, you will be granting more and more rights to investors. So, founders need to strike the right balance.

As we've seen, it's been a challenging environment to raise funding as an early-stage company. Do you see that changing?

Low interest rates are better for capital raising because investors can make more money in ventures and early-stage investing than by holding on to their money and earning interest. The lower the interest rates, the better it is for capital raising. Interest rates are still high, but they've come down a bit and are projected to potentially come down a bit more.

The administration change is expected to be good for businesses because we expect them to prioritize deregulation. More mergers and acquisitions activity usually flows from less regulation but deal activity will still be slow to rebound. We would expect the market for capital raises to still be rather tight, at least for the first half of this coming year if not longer.

Switching gears: co-manufacturers (co-packers) and distributors can make or break a company’s revenue. What types of legal issues should a business consider when choosing a co-manufacturer?

Conduct due diligence to determine what their financial situation is, and to uncover any litigation against them or liens on their assets and facilities. Understand their financial health. Check their insurance to make sure it's a quality policy from a good carrier and that it has the scope to cover the co-manufacturer’s clients. For example, not all insurance policies are going to cover Proposition 65 claims.

If you are relying on a contract manufacturer for some or all steps in producing the finished product, including sourcing ingredients, packaging, and labeling, your agreement with the co-man needs to guarantee compliance with all applicable laws and regulations pertinent to the entire process, including Proposition 65. If you're doing your own sourcing for the product ingredients or packaging, you should have a supplier guarantee agreement that states that all supplied materials comply with Proposition 65 and other laws and regulations. If there is a problem with your product, you want a clear chain of recourse so you can ask the responsible party to pick up the tab.

It’s also very important that your agreement covers good manufacturing practices. Don't just rely on the co-manufacturer signing a piece of paper; go visit and ask about how they're avoiding cross-contamination and other adverse events.

As entrepreneurs think about entering a relationship with a co-manufacturer, what are some criteria that you encourage entrepreneurs to look for in their contracts?

There is such a wide range of co-manufacturers out there. Some are used to dealing with contracts, while others may not offer a contract, or may wince when you suggest one. You should have that discussion early. It's always best if you can start with your own contract, as you're more likely to get the terms you want.

A co-manufacturing agreement is your most important contract for two reasons:

If you can't get your product made, you can't generate revenue, and you can't stay afloat. It’s very difficult to get back into a retailer after you've been discontinued. So, you must ensure that the manufacturer is obligated to fulfill every purchase order - in full and on time - with a product that conforms to your specifications. We refer to this as “guaranteed supply.”
Manufacturing is a key source of potential liability. You must ensure your product is made correctly and in compliance with the law. You need to focus on performance standards in your agreement. Your company needs to have recourse against the manufacturer if the product is not to your standards or in compliance with the law, as outlined by the terms of a manufacturing agreement.

Prop 65 was adopted in 1986. Image Source: Amazon.com.

Another consideration is how you get out of the co-manufacturer relationship if needed, in part, because long-term or exclusive agreements could be obstacles for your brand to get acquired.

Regarding Prop 65, can you talk about where the regulation came from and why it's a big focus for the entire food industry?

Proposition 65 was adopted by California voters in 1986 and “requires businesses to provide warnings to Californians about significant exposures to chemicals that cause cancer, birth defects or other reproductive harm.” Lead and cadmium are listed as harmful under Proposition 65. Unfortunately for food companies, they occur naturally in crop soil, so you often can't always keep them out of food products. Most defendants settle because it's challenging and expensive to defend against Proposition 65 cases. Settlements often result in a reformulation or a warning on the product.

Can you talk about Prop 65 exemptions and the concept of stickering?

To be compliant in California, you need to put a Prop 65 warning sticker on your label. That can be a burdensome operational step and can come at an additional cost, especially if you want to limit stickering only to products sold in California. However, putting that warning on products that are going to be sold outside California may affect sales.

The good news for smaller companies is that if you have fewer than ten employees, your company is exempt from Proposition 65.

Let's talk about the health and environmental benefits claims. Many consumers are very interested in these benefits, and they're oftentimes drivers of purchase. However, there are many regulations about what a company is allowed to claim. What can and cannot be put on public-facing materials?

“helps build strong bones” is a structure/function claim. Image Source: Canva.

There are two federal agencies involved, the Federal Trade Commission (FTC) for “environmental” benefit claims and the Food and Drug Administration (FDA) for “health” benefit claims. Environmental benefit claims come under the FTC’s Green Guides, which are in the form of regulations. They cover recyclability, compostability, recycled content, etc.

The FDA regulates health benefit claims for food, of which there are three types:

The easiest and safest one to make is a structure/function claim. For example, “helps build strong bones” or “helps maintain gut health.” These claims are about affecting the structure or the function of the body.
The second category is health claims. Examples include, “helps lower cholesterol” or “may help avoid a disease.”
The third category is nutrient content claims. For example, “low sodium” or “high protein.” For these kinds of comparative claims, you need FDA permission, which comes in the form of a regulation.

Abiding by these regulations gives you protection against FDA action, although that is honestly not your greatest concern. Your biggest risk is a consumer lawsuit, under federal and state consumer protection laws.

The key to making any claim is substantiation. You must have the proper backing - the more scientific, the better. The more specific the claim is, the easier it is to substantiate.

What about the commonly used term “natural?”

There is no regulatory definition of natural. In general, we advise staying away from “natural,” because it tends to be a magnet for lawsuits. For example, class action attorneys might point to a preservative or an ingredient that’s synthetically made, to claim the product is not all natural.

The organic label is a program of the USDA. Image source: Canva.

Where should the information for substantiation come from? How can brands ensure that information is legitimate in the eyes of the FDA?

You don't have to conduct clinical trials on your product - that's only for drugs. Even dietary supplements don't need that level of scientific support. Check publicly available literature from trusted scientific resources.

Can you talk about claims like organic or gluten-free?

To have the organic label, you need a certification that states that you meet the standards of the National Organic Program, which is a USDA program. Third parties can provide that certification.

Gluten-free is an example of a claim you might want to get a third-party certification. You can say your product is gluten-free if you have the evidence to back it up, which certifications can do. Claiming a product is “kosher” is another example where certification is helpful.

Hillary Hughes is a Principal at Foster Garvey, and legal counsel to high-growth food and beverage businesses across the US. She represents sports & entertainment talent, entrepreneurs, start-up businesses, and established brands as well as angel, venture capital, and private equity investors. She serves as the Chair of the firm’s Sports, Arts & Entertainment practice and chairs the Food & Beverage practice. Hillary counsels clients on a full range of matters, from day-to-day operational concerns to sophisticated transactions.

Ralph Simmons provides regulatory guidance to food and beverage companies, focusing on compliance with FDA, USDA, and state standards in areas such as food safety, labeling, and packaging. He has also contributed to improving regulatory processes and approval systems during his tenure at the FDA.

Getting answers to these commonly asked questions can set entrepreneurs on the right track to a sustainable business. If you have a legal question that is beyond the scope of this interview, we would be happy to put you in touch with the team at Foster Garvey. Reach out today!