Mailbag: Explaining Liquidity and Crunching Legal Marijuana Job Numbers

Q: I see why pot stocks are such a good investment opportunity. But do marijuana companies actually create jobs for people?

A: The cannabis industry is creating a lot of new jobs. Exact counts are hard to come by because marijuana is still illegal at the federal level. So the Bureau of Labor Statistics, a federal agency that usually measures these sorts of things, isn’t allowed to count jobs in the legal cannabis industry.

State agencies also have a tough time counting legal cannabis workers because they don’t have the data infrastructure they need to add cannabis workers to their job counts.

But that doesn’t mean counting legal cannabis workers is impossible. Specialty organizations like Leafly, job hunting websites like Glassdoor, and marijuana talent placement agencies have a good handle on it.

According to a Leafly study, the cannabis industry accounts for 296,000 jobs in the U.S. so far. The industry added 64,389 new jobs last year. And even more job growth is expected this year.

According to Glassdoor, hiring at cannabis companies jumped 76% last year. And the pay is pretty good too. Glassdoor reports the median marijuana salary for cannabis job openings is $58,511. According to the Social Security Administration, the median annual compensation in all sectors is just $31,561.49.

I’ve spent a lot of time talking to cannabis companies over the past few years. And almost every one of them told me that the most important hire any pot company will make is a good compliance officer. A compliance officer who understands how following and enforcing strict marijuana regulations can lead to more profits is the most sought-after commodity in the market. People like that can write their own checks.

+ Early Investing Senior Managing Editor Vin Narayanan

Q: When you use the word liquidity, what does it mean? And does it mean something different for startups than it does for crypto?

A: A good place to start is Investopedia’s definition: “Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words: the ease of converting it to cash. Cash is universally considered the most liquid asset.”

This definition partially applies to cryptocurrencies. A coin’s liquidity is based on volume. In other words, how much of it is bought and sold in a given period (be it hourly, daily or longer). The bigger the volume, the more liquid it is. As liquidity increases, the crypto asset becomes easier to buy and sell and more likely to reflect its market-based value.

But the rest of Investopedia’s definition doesn’t really apply to cryptocurrencies. Crypto coins can be bought and sold for other crypto coins. Volume doesn’t pertain just to cash transactions. So liquidity is not necessarily tied to fiat currencies like the dollar or euro. In fact, most coins cannot be bought and sold with dollars. (But they can be bought and sold with bitcoin.)

This is slowly changing. More and more coins can now convert to and from dollars. But it’s fitting that the liquidity of cryptocurrency, which was created as a superior alternative to fiat cash, is not exclusively tied to cash transactions. And in the crypto world, bitcoin – not fiat currency – is considered the true measure of the intrinsic value of cryptocurrencies.

In the startup world, liquidity is often coupled with “event.” So what exactly is a liquidity event?

It’s when investors can cash out their equity stakes in startups and convert them into liquid public shares (which can be sold for cash immediately or at any point in the future). There are two types of liquidity events a startup can experience: an IPO or a buyout.

Startups that launch an IPO in order to join a public market see their shares go from private and illiquid to public and highly liquid.

When a startup is bought by another company in a buyout, the liquidity varies.

If startup A is bought by company B and company B offers cash for startup A’s shares, you have a nice and clean liquidity event. But if company B offers startup A investors shares of company B, it gets complicated.

If company B is private, investors swap one set of illiquid shares for another set of illiquid shares. That’s not a liquidity event. But if company B is public, then investors are swapping illiquid shares for liquid shares. That’s a liquidity event because it would be easy to cash out those newly acquired shares.

Buyouts can also offer a combination of cash and shares. In that case, if the acquiring company is private, that’s a partial liquidity event.

Liquidity’s optionality is considered a plus in the investing world. And a lack of liquidity is seen as a negative. It’s why some investors prefer getting coins as opposed to private shares in return for their investment. And it’s why buying private, illiquid shares comes with an intrinsic discount of 5% to 10% (at least in theory).

But there are plenty of exceptions. Private shares that are in high demand often carry a premium as opposed to a discount. And long-term investors place far less importance on liquidity than short-term investors do.

The presence or absence of liquidity plays an important role in both the startup and crypto investing worlds. The more you know about it, the better investing decisions you can make.

+ Early Investing Co-Founder Andy Gordon