On the 5th day of Christmas, my client gave to me, 5% royaltieeeees… (Mel’s Remix)
In honor of the holidays, I’d like to share a few tips with you to make sure you go into the new year with new knowledge. Instead of the 12 Days of Christmas, I present to you — The 12 Days of Contracts! Yes, I’m a legal nerd!
In these 12 days, I will share some contract basics, terminology, and other info so you can be more informed on what a proper contract needs to contain to make it valid and enforceable.
Prior 12 Days Posts:
Don’t leave money on the table because you don’t understand the payout! Fair and easy compensation for your services or creations is the paramount goal.Melanie Rodriguez aka The Entertainment Esquire
Here’s a disclaimer: this is a very broad analysis regarding ways you can get paid in a contract. The examples are simply for explanatory purposes. This is not formal legal advice and just for informational purposes.
Are you ready to say , “show me the money”? Recall our discussion from the Day 1, if there is no exchange of consideration (i.e. money), it’s simply a gift. You may be charitable, but it’s hard to make money if you always give things away for free!
As the name implies, flat fees are calculated one time, at one flat rate, paid once or at regular intervals. For example, you can provide creative services for a flat rate fee of $10,000. Flat fees are a decent option if you are only providing a service and/or not exchanging ownership.
Flat fees are beneficial if the contract is for providing services once, regularly, or there is no exchange of ownership.
Payment Terms + Audit Rights
Payment terms can also get buried sometimes. Realize that it is your responsibility to negotiate when you want to get paid or when you are able to pay. However, understand that accounting, especially in the entertainment business, can provide long time gaps from when you sign the contact and when you see the payout. For example, in the music industry, it can take 12 months or more for the royalty cycle to complete. Thus, payments for releases can be delayed until the money starts flowing. This is where partial payments upfront can help secure timely payment for services.
On another note, make sure the contract contains provision for audit rights so that you have a means to investigate whether your payments are accurate. An audit, similar to a tax audit, is being able to look at the books and records of the paying company. This is often expensive because it needs to be done by a professional in the industry who is familiar with entertainment accounting.
Here’s a caveat: Audit rights are usually not indefinite. Typically, you are given a set time to request the audit (e.g. 1-2 years) or else the right is waived and the payment is automatically deemed to be accepted and valid. Check your statements carefully to make sure your payout calculations make sense.
Calculating royalties is a different story because, well, it’s complicated. VERY complicated. Again, this is a bird’s eye view of royalties. It is not exhaustive and not intended to replace the advice of an attorney.
A royalty is simply a division of proceeds, as described in Don Passman’s book “All You Need to Know About the Music Business“. (I highly recommend this book, feel free to use this affiliate link) Imagine it like a pie, where you get your negotiated slice and the other parties get theirs. A royalty rate is the percentage split agreed between the parties. Royalties can be calculated in a number of different ways and come in different forms. For example, a royalty rate is a 80/20 split, meaning 80% goes to one party and 20% goes to the other party.
One distinction is whether royalty will be paid on net or gross. If a royalty is paid on net, the royalty is calculated after expenses are paid. Whereas if it is paid on gross, it is paid before expenses.
Another consideration is whether the royalty rate is a fixed number tied to sales (for example, $1 per unit sold) or a percentage of a base rate (for example, 5% of net sales). In the music business, royalties can also be split into different rates for different products, such as streaming rates, price of physical items like CD sales, singles, etc. With music specifically, they are calculated using the statutory rates (for mechanical and performance) provided by a group in the US Copyright Office. These are complex formulas that is too extensive to get into here since this is just a primer.
You can also designate if you want the royalty to be paid in a lump sum or split into periodic payments. Or if you need some sort of up-front payment that is paid in addition to normal fees or can be considered an advance on royalties (i.e. a pre payment that will be deducted from later payments).
Calculating royalties can be complex and confusing as there is very specific terminology to understand (and not what we covered here). However, in a contract, the royalty rate should be clear. If there is any questions, clear that up before you sign!
“The will to win is worthless if you don’t get paid for it”Reggie Jackson
Questions to ask:
- 1) Is there a flat fee, royalty payout, or both? Flat fees are beneficial if the contract is for providing services once, regularly, or there is no exchange of ownership.
- 2) How is the royalty rate calculated? On net or gross? Royalties calculations are complex, but they don’t have to be secretive. There are crucial differences between net and gross that impact the bottom line. Royalties can also be based on percentage of sales.
- 3) How long am I receiving or sending payment? A flat fee is usually collected only one time, whereas a royalty is for the term of the contract or longer. Collection of payments and making payouts can sometimes continue after the term of a contract ends. Make sure you are aware of these important points.
- 4) What are the payment terms and audit rights? It is important to know the method of payment (i.e. wire transfer, check, online payment) and whether payment will be made at certain intervals (e.g. every month), based on accounting cycle (e.g. quarterly) , or some other method. Maintaining audit rights is critical if you want to preserve your ability to dispute calculations and payouts later.
If you have any questions related to an contract you signed or need guidance for constructing your contracts, please contact me.
*Disclaimer: This post is for informational purposes only and does not constitute legal advice. An attorney client relationship is not formed until there is a signed fee agreement*