For many artists, the next best thing to a recording or publishing contract is an independent release or, at the very least, a professional quality demo tape. Unfortunately, these things cost money and you’re working for tips. Friends and family may be interested in helping you out. You may meet someone with a studio who is willing to work with you on spec, providing free studio time in return for a percentage of proceeds generated by your recordings. Every now and then, as you struggle through open mikes and low paying gigs, someone with an honest to goodness day job may be in the audience, like your music a lot, and want to invest in your career by making a cash infusion to finance a recording project. You need to be able to take advantage of such an opportunity before it walks out the door to another club. You should be prepared with concrete information about how much money or free services you need and what kind of payback your new best friend(s) can expect from getting in on the ground floor and helping you out when you most need it.
Your first job is to know what your goal is. Do you want a professional quality demo tape so you can shop around for a recording or publishing deal? Do you want to distribute and market you own independent release? Will you sell it from the stage or from local stores? These issues impact not only how much money you need, but how your investor may be repaid. Prepare a written business plan, with a detailed budget and a schedule. Consult with fellow artists, producers, etc. to be as accurate as possible. Make sure you know how much it will cost to hire musicians, rent studio time, engage a producer, engineer, masterer, cover artist, manufacturer, etc. Be sure to include money for legal expenses. You may also need to include living expenses. For your own protection, err on the high side.
Source of Repayment. Your investors sole source of repayment should be revenue produced by the project, if any. Depending on the nature of your project, that may mean revenue from your independent sales and/or revenue from recording or publishing deals that result from the project. Do not sign a promissory note. You should not agree to be personally liable for repayment. Otherwise, you might as well go to a bank. Your investor should be told up front that any investment in the entertainment business is high risk, unpredictable, and may never pay off.
Limiting repayment to project revenue may not be enough. As you know from reading these columns, but as your investor may not know, a record can generate several revenue streams, i.e. the various artist and publishing royalties. You may want to limit your investors sources of repayment to the net revenue generated by the particular sound recordings being financed, not the underlying compositions or future recordings not financed by the investor. Your argument is that the investor is financing these recordings, not your writing, and should only reap rewards from what he/she has invested in. The investor’s argument is that, in light of the high risk, he/she should be able to tap into any and all resulting revenue sources for repayment.
Amount of Repayment. You want the investor to get a fair return on the investment, but you don’t want the investor to own a piece of you forever. At some point, a $20,000 to $30,000 investment should be considered paid off. Because of the high risk, something more than the market rate for savings accounts is appropriate. Perhaps two or three times the initial investment is fair. After all, I would argue, few banks offer 200-300% interest. The other side to that, of course, is that a bank is more likely to actually pay the interest. The important thing is that there be some sort of limit, without discouraging your investor, who is attracted by the notion of getting in on the ground floor and retiring once you make it big.
Possible formulas call for the investor to receive 100% of all net proceeds of the project until the investor has recouped the initial investment, and then a reduced percentage until the investor has received an additional set amount. I argue for a reduced percentage from the start, so you will have something to live on, too. Some formulas cut off the repayment after a certain number of years. Other formulas limit repayment to a certain number of albums.
Structure. These deals can take many forms. Perhaps your project will take the form of a general or limited partnership with your investor, although I prefer a simple investor agreement, so there is no question about joint ownership or joint control. Try to retain ownership of the master recordings and your publishing. Encumbering your control of these things now may make it harder for you to get a deal down the road. Try to get the investment money up front in one lump sum, rather than in stages. You don’t want your investor to back out halfway through the project.
Whatever you decide, it is critical that you hire a lawyer and have the agreement reduced to writing as clearly as possible. Artists from MC Hammer to Billy Ray Cyrus have had to field claims from angry investors once their careers took off. In addition, when you sell someone an interest in your career, like a profit participation, you are selling a security. Federal securities laws and state “blue sky” laws, designed to protect us all from investment fraud can be quite onerous and even nonsensical when applied to the relatively small investments we are talking about. The smaller the number of investors, the smaller the amount of money involved, the more personal your contacts, etc. the more likely you are to be exempt from the many disclosure, registration, and other requirements of these laws, but that is beyond the scope of this article.