Equity Financing

There are numerous ways to finance any motion picture, but in the independent film world the most surefire way is to independently finance through equity investors, which could be anyone from friends and family, an independent third party, a company, a corporation, or anyone you may have pitched your script or project to who either shares your vision and passion or thinks it’s a good investment. No equity investor wants to lose money, and finding equity investors isn’t easy. So, my advice is to protect any equity investor as though it’s your own money because if your investor makes his money back and even makes a modest profit, the likelihood is that the investor will continue to roll with you again and again and you won’t have to keep reinventing the finance wheel each time you make a film. Even the great Orson Welles said that he spent approximately 10% of his time actually making movies and about 90% of his time trying to get his films financed.

Self-Financing

There have been many times over the years when I’ve trusted my analysis of the marketplace and personally financed my own movies. Many people think that film is not a good investment, but if you know what you’re doing, and have done proper due diligence and analysis of the marketplace and trust your ability to make the film for less than market value, there is money to be made. I’ve actually made more money financing my own movies, rather than through conventional means, since there are no loan fees being charged by a lending bank, completion bond fees, or splits with equity partners. The most interesting thing about self-financing is that it forces the filmmaker, whether writer, producer, or director, to be as conscientious as possible, to be as cost-effective as possible, to be as creative as possible, and to make the highest-quality film possible so that it is most commercial for the marketplace that you’re making the movie for. With other people’s money, filmmakers are uniformly less responsible and more indulgent.

Bank Financing

Bank financing is something that is vastly misunderstood by most filmmakers. There is a pervasive perception that banks are magical institutions that will either loan money without collateral or loan a piecemeal amount of money toward the making of a film. This is the furthest thing from the truth. In order to induce a bank that has an entertainment lending division to loan money at all, there must be solvent and acceptable securitized collateral, in the form of cash, convertible securities, contract, or letter of credit from a source or sources on which the lending bank has done its due diligence, and through the scrutiny of their loan committee, has determined to accept as bankable collateral. In the case of motion pictures, banks will not loan money unless what is defined as the “strike price” has been met. The strike price is the total amount of money that is required for not only the cost of pre-production, production, and post-production to complete the motion picture and deliver it in accordance with every delivery schedule in every territory worldwide that are bonded through a completion guarantor, but also the cost of financing, the loan origination fee, the interest reserve, legal reserve, and completion bond, which is generally 3% of the total budget.

The strike price may be met by demonstrating the total contractual collateral. These collaterals can include international and domestic sales contracts with bona fide distributors who are acceptable to the lending bank, or a combination of territorial sales contracts (at times letters of credit from certain distributors may be required, depending on the cash flow of the distributor at the time, or how much outstanding debt a particular distributor may have at the time of the loan), subsidies, tax credits, and perhaps an equity investment component. Any combination of these may be used to meet the strike price.

Completion Guarantors

Banks require a completion bond, and both banks and completion bond companies require a full 10% contingency. Completion guarantors are companies that are well-versed in all facets of production and post-production and based on their due diligence on a film script, budget and schedule, and delivery schedules required by all key distributors, guarantee to banks or financiers that the producer will complete and deliver the film to the distributors (based on an agreed upon script, cast, and budget), thereby triggering the payment to the bank, financier, or producer if there is no loan in place.

Bond companies scrutinize not only whether they in their professional expert opinion agree that the film may or may not be produced for the proposed budget, under the proposed schedule, in accordance with the screenplay as written. They analyze screenplays and whether or not they believe that sequences may be filmed, as written, for the amount of time and money allotted. They also scrutinize and vet the abilities of key personnel, particularly the director, first assistant director, line producer, production manager, producer, cinematographer, and reliability of key star actors, since these personnel will ultimately be responsible for keeping the production on budget and on schedule.

Critically, since the bond company, or completion guarantor, is financially liable if the film goes over budget, under the bond agreement they have the contractual right to “take over” the film, which includes the right to hire and fire any personnel, including the director, subject to the DGA collective bargaining agreement and creative rights provisions if the director is a union member. However, completion guarantors also know that it in their best interest to work with an established production team to assist them to complete production on schedule and on budget, as taking over a film is not only traumatic for all involved, but also a tremendous amount of additional work for the bond company.

Bank financing rates for motion pictures are generally among the highest prevailing rates and fees under the law. Banks requires a new “clean” corporation or LLC, with no assets or liabilities, which the holds the rights to the screenplay, copyright, intellectual property rights, and distribution rights, and which acts as the borrower for the film loan. When the bank loan is repaid and its lien on the picture is removed, then all of the rights to the film transfer to the owner(s) of the corporation. These rights generally include all unsold territories, the intellectual property rights, copyright, distribution rights, and the right to resell the picture in perpetuity in all previously sold territories, once the term of those sales expire.

Limited Partnerships

A limited partnership (LP) is a form of partnership similar to a general partnership, except that, in addition to one or more general partners (GPs), there are one or more limited partners (LPs). The GPs are, in all major respects, the same as in a conventional partnership; i.e., they have management control, share the right to use partnership property, share the profits of the company, and have joint and several liability for the debts of the partnership. A limited partnership might be formed specifically to attempt to raise the financing for a specific motion picture. Like shareholders in a corporation, the LPs have limited liability; however, rules and legal nuances may vary from state to state.

LPs are common in the film industry; however, I have personally never made a film under the auspices of a limited partnership, although many have, with some success. Most of the limited partnerships that have crossed my desk were almost invariably formed to promote films that were the wrong casts for the wrong budgets and usually the wrong genres, which I knew, based on my understanding of the marketplace, were not going to be commercially successful. Ultimately, the uneducated partners end up losing money, and those promoting the deal generally don’t care as they get fees up front and move on.

Pitching a Deal to Equity Investors Is Like Pitching a Script

How does one approach an equity investor? If you are trying to sell an equity investor or a foreign buyer, you must instill that person with confidence in the movie you intend to make, and it is critical to tell a good story. To tell a good story, you’ve got to have passion and charisma, and be able to relate that passion to an equity investor. Secondly, by sharing the due diligence that you and possibly your sales agent have done to identify a desirable trend, along with the creative and financial analysis, you can have confidence in what the market will bear for your picture. Letting a potential investor know that you intend to make your film for substantially less than market value will paint you as being fiscally aware and responsible and will instill much more confidence in an equity investor. As discussed earlier people aren’t just evaluating your project, they are evaluating you personally, particularly in the instance of investors who want to feel that they are in good and competent hands.

As there is no way to create a true profit and loss (P&L) statement for an unfinanced film, one could show a historical P&L for a similar film’s performance. As discussed earlier, sales agents can give projections of how they, in their professional opinion, believe a film will perform, based on their current due diligence in the marketplace and the film’s market value based on their research, but these numbers are not binding. Also, as discussed earlier, there are numerous variables that can affect a film’s value, positively or negatively, by the time the film is delivered, not to mention the ultimate quality of the film and whether or not the film “works” and delivers on its promise to the buyers.

Social Media and Crowdfunding

Kickstarter (the most well-known of the crowdfunding websites) focuses on creative endeavors including design, the arts (film, publishing, music), gaming, and technology. Kickstarter accepts only 60% of the 2,000 or so projects that apply each week and only takes projects of an artistic or creative nature; Indiegogo (originally launched with a focus on film) pivoted to include funding for literally anything and is becoming known for financing personal and cause-related campaigns. With Indiegogo, as long as it’s legal and the project isn’t pornographic, all projects are accepted. The downside is that there is a lot of clutter for your project to rise above. However, there are options to go with either Fixed Funding, whereby all contributions are returned if you don’t meet your goal, or Flexible Funding where you keep all contributions even if you don’t meet your campaign goal. Flexible Funding is often a great fit if you don’t have a strict go/no-go funding minimum. GoFundMe has no deadlines or limits—each donation you receive is yours to keep; Peerbackers is one of the top crowd-funding websites that focuses on funding entrepreneurs and innovators; RocketHub, initially launched with the arts in mind, expanded to include science, education, business, and social good projects; other crowdfunding options include Patreon,YouCaring.com, crowdrise, DonorsChoose.org, Kiva, and GiveForward to name a few of many. All are websites that are basically platforms for creative enterprises, including film projects, which are brought to life through the direct support of small dollar contributors over the Internet, and have caught on like wildfire to the point that the biggest problem filmmakers have is how to rise above the clutter and glut of product and projects. If people venture onto a website and happen to like a project, they can pledge money to help raise the financing to get it made, anywhere from a dollar to thousands of dollars. On most funding sites, if the project succeeds in reaching its funding goal, all backers’ credit cards are charged when time expires at the deadline set by the creator of the project. On most sites, it’s all-or-nothing, meaning if the funding goal falls short, no one is charged and the filmmakers can regroup and rebudget and reposition the project, seek other alternatives, or abandon it altogether.

Every project has a funding goal and deadline and filmmakers have complete control as well as complete responsibility over their projects and how they are presented on the public website. Presentations usually include a video that explains the nature of the project and rewards that are offered to backers. In crowdfunding, the contributors do not receive equity in the projects they donate money to, and in most cases, contributors are offered “incentives,” which range from a copy of a script, a download of a song, a DVD or download of the completed film, to cast memorabilia, a set visit, or invitations to premiere screenings, depending on the level of contribution.

From publicly published information, the following is a sample of 2014 numbers in terms of volume, U.S. Alexa rating (Alexa is an Internet company that tracks and provides traffic data and traffic ranks, which are based on based on a combined measure of unique visitors [unique visitors are determined by the number of unique Alexa users who visit a site on a given day] and pageviews, which are updated daily), fees, and restrictions of some of the major crowdfunding sites:

• GoFundMe— $470M volume—U.S. Alexa rank 315–5% fee—over $3 billion raised for personal fundraisers. (Processing fee of 2.9% + $0.30 applies.)
• Kickstarter— $444M volume—U.S. Alexa rank 218–5% fee— personal fundraising not allowed— creative projects only. (Processing fees of 3–5% apply.)
• Indiegogo— 2014 volume not listed—U.S. Alexa rank 746–5% fee—(3% processing fee. $25 fee for international wire).

There was no volume cited for the following sites:

• Patreon— U.S. Alexa rank 601–5% fee—(Must pledge an ongoing amount. Creative projects only. Additional processing fee of 4%.)
• YouCaring.com— U.S. Alexa rank 4,093—fee 5%—(5% fee is suggested to campaign donors. Processing fee of 2.9% + $0.30 applies.)
• crowdrise— U.S. Alexa rank 5,368—fee 5%—(Free accounts charge 5%, paid accounts are 3%. Processing fee of 2.9% + $0.30 applies.)
• DonorsChoose.org— U.S. Alexa rank 5,368—fee 5%—(Free accounts charge 5%, paid accounts are 3%. Processing fee of 2.9% + $0.30 applies.)
• Kiva— U.S. Alexa rank 5,368—fee 5%—(Free accounts charge 5%, paid accounts are 3%. Processing fee of 2.9% + $0.30 applies.)
• GiveForward— U.S. Alexa rank 22,730—fee 5%—(5% fee is charged to campaign creators. Processing fee of 2.9% + $0.50 per transaction applies.)

New crowdfunding platforms launch literally every day, so I’m only citing a few select ones that have the best track records and have been around long enough to build traction and a good reputation.

Grants

Film grants are blocks of money offered, often by government agencies or private organizations, for the purpose of funding production of film, television, or new media projects that meet certain criteria and which can easily be researched on the Internet. Grants are almost always funded prior to the development of the project, based on a specific idea and criteria, usually for things that raise social awareness in specific arenas. Consequently, our model for “tapping” into the marketplace doesn’t really apply when it comes to grants. For example, a friend of mine in Los Angeles obtained a grant from the federal government to produce a series of half-hour webisodes on the issues of Internet safety awareness and bullying in school.

Government agencies are a major source of support for documentary films. In fact, these grants are among the most generous. The top three U.S. government funders for documentaries are the National Science Foundation (NSF), National Endowment for the Humanities (NEH), and National Endowment for the Arts (NEA), which collectively award millions of dollars to filmmakers every year. A large portion of the Public Broadcasting Service (PBS) schedule is underwritten by these funds. The NEA was established by Congress in 1965 as an independent agency of the federal government and has awarded more than $4 billion to date in support of artistic excellence, creativity, and innovation for the benefit of individuals and communities. The NEA extends its work through partnerships with state arts agencies, local leaders, other federal agencies, and the philanthropic sector.

Another avenue available to filmmakers for obtaining funds from the federal government is by being awarded a government contract to provide services. To be considered as a government contractor, you need to “bid” for the job. A multitude of service companies list daily opportunities as they arise, but you need to subscribe to that service, and it could be costly. I’d recommend taking a free trial offer with one of those vendors, so at least you can get an idea of what agencies are seeking, the scope of work involved, and the recent historical amounts awarded for specific productions. My recommendation is to obtain a copy of a project that was previously produced and compare the grant that was awarded with what the actual cost of production might be for you to make a project of a similar level, and decide whether or not your project is financially feasible to produce and if there is any profit margin and within that model. This due diligence will dictate whether or not it is worth pursuing. One resource that a friend of mine utilizes to investigate these opportunities is FedBizAccess (www.fedbizaccess.com). As an alternative, any U.S. citizen can request a government agency to provide contracting opportunities when they arise, or information on where to search for them, at no cost.

Another way to obtain federal funding is through the competitive grant process. A number of federal agencies announce grant opportunities to the general public through the U.S. Department of Health and Human Services at www.grants.gov. Generally the purpose of these grants is to help solve or address a critical issue. Obtaining competitive grants involves far more than just writing a synopsis. It is a very technical process and there is a mountain of information that will be requested. On www.grants.gov, one can link to competitive grant announcements and discover exactly what’s involved. Be cautious and thorough when compiling your grant application, as you may be disqualified if you don’t follow the instructions exactly.

Subsidies

Subsidies are also known in the industry as “soft money” and can vary from state to state, in those states which offer financial incentives. (Some states offer nothing.) Subsidies may be in the form of cash rebates, tax incentives, or tax credits, which often can be sold for or factored for cash, and which often constitute a component of the financing for a movie. They exist to attract filmmakers and production to a state, thus generating employment opportunities, creating a new industry that may have heretofore not existed in a particular state, as well as stimulating the economy. There are also many foreign countries that offer a wide variety of subsidies and/or film production incentives, which exist for all of the same reasons as do North American subsidies.

I personally have accessed subsidies, incentives, and tax credits or rebates all over the world. In North America, I have accessed them in New Mexico, Louisiana, Rhode Island, Connecticut, Texas, and New York, and internationally in countries including Canada, the United Kingdom, South Africa, and India.

For many years, there has been a tremendous amount of U.S. film and television production in Canada, which offers a wide array of subsidies for films that are produced in Canada and which vary from province to province. Additionally, films produced under the Canadian Audio-Visual Certification Office (CAVCO) with stringent Canadian content requirements offer far greater subsidies, but it is difficult for Americans to comply with all of the mandatory restrictions. Generally, either the writer or director must be Canadian (a citizen, landed immigrant, or permanent resident). The highest-paid actor may be non-Canadian, but the second-highest-paid and all other actors, with the exception of an additional limited cameo role, must be Canadian. All other goods and services providers, such as equipment vendors, labs, post-production services, and special effects, must be Canadian. There has generally been one allowable non-Canadian production credit. Non-Canadian executive producer credits are allowed, but they must be commensurate with the number of Canadian executive producer credits. The production company and everyone and everything else other than the exceptions outlined above must be Canadian, and the producer of record must be Canadian. I have made many films in Canada over the years. Some have had Canadian content and some have not. An additional incentive to shoot in Canada is when the Canadian dollar is far weaker than the U.S. dollar, and a great deal of money may be saved simply by the exchange rates.

In many foreign countries there are co-production treaties, many of which offer substantial subsidies, but there are even more stringent requirements to adhere to when there are two or more countries involved, and the legal paperwork is voluminous. I made twelve films under a U.K.– Romanian co-production treaty, all shot in Romania with U.K. and Romanian actors and one U.S. star. The writer, director, and composer were all from the U.K. and all post-production was done in the U.K. as well.

Subsidies: Too Good to Be True?

In the U.S., beware of state subsidies that look too good to be true. Understand that your crew, equipment, hotel locations, vendors, travel and living expenses, production offices, staff and local actors, fringe (pension, health, and welfare contributions), and payroll and all other local items and expenses would generally qualify for subsidy calculation. However, almost certainly, your stars, director, writer, producers, director of photography, as well as post-production, special effects, and film and video lab work would, with occasional exception, be done outside of the subsidy state and would not qualify for subsidies. Factor in the costs of SAG-AFTRA actors’ first-class travel and living expenses for four weeks of production, plus a couple of pre-production days for hair, make-up, and wardrobe. You will most certainly travel at least a couple of actors, plus travel and living expenses for key out of state crew.

Greater expenses equal a higher budget and in turn higher union rates, higher payroll rates, and higher pension, health, and welfare contributions. Consider that if you shot the exact same film on the exact same schedule in a right-to-work, non-union state, your below-the-line costs might be half or less of what you might spend in a state with terrific subsidies. I’ve seen movie budgets that more than double in order to get back a subsidy of 30%! For example, a low-budget non-union film that might be shot for $500,000 (and would likely have a worldwide market value of $700,000) would cost at least double that in order to get 30% back from any number of subsidy states. With a market value of $700,000, you would have an ingoing loss of $300,000, not counting sales agency fees and expenses, which would total at least another 20%, or a $440,000 loss to shoot in a unionized subsidy state. How would anyone finance that? Conversely, in a non-union scenario, the exact same picture would recoup its costs, pay 20% sales agency fees and expenses, and generate $100,000 in profit.

Most states offering the greatest subsidies are not right-to-work states, which will necessitate a film being signatory to most union contracts, thus shooting with union crews and all of the additional financial obligations that go along with it. Don’t be misled by some of the larger subsidies being offered, and put pencil to paper and calculate whether it is more cost-effective to shoot in a state with large subsides, but an increased budget, or to forego financial incentives, rebates, subsidies, and tax credits if the film can be made more economically without them for a far lower budget, thus giving investors a greater chance to recoup their money.

State subsidies make the most sense for large-budgeted pictures or TV shows, generally produced by studios or networks, which are all signatory to all union collective bargaining agreements and must shoot the pictures under union contracts. For studios, it is a terrific asset for them to be able to lower their already hugely inflated costs of production. Studios are working with the vast resources of public conglomerates. However, for independent filmmakers, subsidies and the promise of free money, like anything else that’s allegedly free, adheres to the old adage: “If it sounds too good to be true, it probably is.”

Multiple Source Financing

In today’s economic climate, most producers ferret out a combination of several of the above forms of financing, in order to meet the total budgetary requirements for a film project. For instance, I have shot many films under Canadian content regulations, meeting all of the CAVCO requirements, which include procuring a Canadian broadcast sale prior to production. The Canadian subsidies and broadcast sale are bankable, particularly with Canadian lenders. The total of the Canadian subsidies and broadcast sale might be 40% of the picture’s overall budget. Often I have made a U.S. pre-sale, which might make up 35% of the picture’s budget, which I have banked with a U.S. bank, which would loan only on the U.S. portion of the collateral once the total strike price has been met and demonstrated to the satisfaction of both lending banks. Then I have found an equity finance component, whose investment was secured by all foreign rights that remained unsold and free and clear collateral to repay the equity investor. The combination of the financing components and their respective sacrosanct collateral equaled the total strike price being met and for all parties, there was the added security of a completion bond company, which for its 3% fee, guaranteed completion and delivery of the picture as required by the banks and the Canadian and U.S. distributors. To recap, the strike price was met by a combination of the Canadian subsidies, Canadian broadcast pre-sale, domestic sale, and equity component, which precipitated the U.S. bank to be able to loan solely against the domestic contract and a Canadian bank to loan against the Canadian subsidies and broadcast pre-sale, and the equity investor was secured by foreign rights.