Have you found yourself in that uncomfortable situation where the only obstacle between your musical dream and its completion is money? A half-mixed recording, a truck with a broken axle, a fried P.A. system, or an unpaid producer are not glamorous benchmarks of superstardom, but in the real world, these and other similar occurrences happen. Many a tour, demo project, studio, independent record release, or music-related business has fallen by the wayside because of lack of funds. If this is your dilemma, maybe it’s time to think about going beyond your immediate resources and obtaining third-party money to bring your project to fruition.
The music business is just like any other business—it takes money to run it. From nominal scholarships donated by family members for piano lessons to the multimillion-dollar corporate underwriting of a national tour, there are a wide variety of money sources available to musicians. Unfortunately, much has been made in the media of entertainment money deals that have gone sour, making both investors and those seeking investors distrustful of each other. If you are well informed and prepared, working with someone to finance your project doesn’t have to be an antagonistic situation. Before making important money decisions with other people’s money, you should consider a number of business and legal points.
Let’s first look at some of some of the misconceptions about the financial side of making music. In the couple of decades I’ve worked in the industry, I’ve heard a few phrases about money and music often enough that I am compelled to discuss them before going any further. I call these phrases “The Five Financial Fallacies.” These are negative thoughts about money that can become self-fulfilling prophesies for musicians trying to carve out a career in the industry. I can’t tell you what to think, and I can’t change your belief system. Invariably, the musicians who believe these fallacies have a hard time with money even after they become successful, and those who don’t accept them develop a healthy attitude about money and music.
Fallacy Number One: “It doesn’t matter if I fail. I’m getting the money from a rich guy just looking for a write-off.” The person who thinks this way is starting out expecting failure. Remember that there’s a difference between taking a calculated risk and admitting failure from the start. The investor is willing to take a risk, and it makes business sense to get the best possible tax benefit from every venture. This includes writing off an investment for the tax years that the venture is investing in itself or losing money. However, don’t confuse this wise financial planning as a desire to lose money. Repeat after me: No one ever became rich trying to lose money. An investor can’t keep losing money forever, because either the investor will run out of money, or after several years of the investor losing money, the IRS will treat the losing business as a hobby. Take a hard look at how you characterize yourself in the music business before bringing a businessperson into it with you. Decide whether your music is a hobby or a business, embrace that decision, shoot straight with your investor, and proceed accordingly.
Fallacy Number Two: “Corporate executives are in it only for the money.” Musicians often feel that there is a line of demarcation between art and commerce that a person consciously crosses to turn their back on “the Good Guys” on the side of creativity. I know a lot of entertainment industry executives who got into the business with the love of music as their main incentive. After getting jobs in the industry, one of the duties usually found in their job descriptions is to protect the investment of their investors and to generate a profit. Why should a person be negatively judged for doing their job well? Having a title doesn’t mean that a person totally abandoned the artistic side of the music. They simply have to factor in how the music fits into their job duties and goals. Music is a highly competitive and risky business in which under the best of conditions and intentions still produces more projects that lose money than make money. Executives need to be concerned about all of the aspects of their businesses—especially the bottom line. Before judging an executive’s motivations, look at their track record and treat them as a human being first.
Fallacy Number Three: “I don’t need to figure out right away how to pay back these four credit cards and the people who loaned me money for my career; when I have a multiplatinum record, I’ll have millions of dollars to pay them off!” Paying back debt at credit card interest rates or repairing a damaged credit rating can take years; repairing personal relationships due to unpaid loans can take even longer. Promising to pay back loans from your music business without having an understanding of how money is earned in the music industry is simply irresponsible. Excessive and uncontrolled debt can be a one-way ticket to a financial morass that could haunt you financially and emotionally for a long time. If your debt structure is out of hand to a point where it runs your life, you might have a debt problem. You should consider seeking professional help or a support group if it is out of control.
Fallacy Number Four: “Rich people are bad people.” People sometimes use this belief as an excuse not to succeed; they don’t want to ever become a bad person and the easiest way to avoid becoming a bad person is to not make money. Fear or loathing of success is one of the main reasons people fail in the music business. It is simply an unfair stereotype. You might as well say, “All bass players show up late,” “Women can’t play the drums,” or “All Germans steal.” Some of my best friends are rich, and I feel that they are great people. Some had hit records, some earned their wealth by working for others, some inherited it, and some made money with their own businesses. However they came about obtaining their fortunes, they didn’t suddenly become jerks when their incomes exceeded a certain dollar figure. The same applies to you. Simply vow not to change if and when you succeed financially. A good guideline is to commit to your own value system regardless of your net worth, embrace the eventuality of your reward, and then follow through on those things that bring the reward.
Fallacy Number Five: “I’m not worthy.” This fallacy has endless variations, such as the starving artist, the struggling musician, and the poor soul who gave it all up for self-expression. They all lead back to a very strong belief that doing what you love and being financially successful are mutually exclusive. They are not. Just because you’re not generating millions of dollars from royalties doesn’t mean you need to be making zero for your efforts. There are thousands of choices between being a struggling artist and being a huge superstar; the key is to find where you realistically fit into the spectrum. A career in the music industry isn’t an all-or-nothing proposition; just be realistic and clear about your needs, wants, and vision of success.
If there is any project in your career that requires careful pre-production, I highly recommend that you rank submitting a proposal to a third party for funding high on the list. Whether you scribble a pitch for cash on a napkin in a restaurant or craft an elaborate formal presentation with full-color graphs, charts, and multimedia fireworks, the plan for how you intend to make money from your artistry needs to be clearly conveyed—first to yourself—and then to a potential investor. In order to do this, your proposal must contain some key basic elements so that you can negotiate in solid financial terms rather than unclear daydreaming terms. Because of securities laws, depending on the method you take to seek investors (particularly if you are obtaining money from people that you don’t have a pre-existing relationship with), you may also have to file additional documents with or obtain permits from your state and/or include certain disclosures in your proposal required by your state or even the federal government.
The process of drafting your proposal will also be a good tool for you to objectively take a step back and evaluate what you are intending to do with your artistry and with your money. Often, musicians are so happy to simply be creating or playing music they don’t give a lot of thought to where their money comes from and where it goes as long as they can somehow sustain a living. The proposal helps dramatically with the reality check of accountability to a third party. Some of the major points you may consider when drafting a proposal include:
State with a high degree of detail how you earn, or propose to earn, your money. Examples could be selling recordings, songwriting, performing live, producing records, or owning a recording studio. If you have a track record for your earnings in any or all of these arenas, include it. If not, you may want to research how others have done so and include realistic projections of how you plan to earn your money. This demonstrates how serious you are about your goals and lets investors know that you understand your business.
Let the investors know how you plan to use their money. Will it be to purchase equipment, pay yourself a salary, pay for studio time, buy your recordings or musical compositions back from a record label or publishing company, hire other musical professionals, or implement a marketing plan? Include concrete examples with real dollar figures in your proposal to help the investors evaluate your plan. Include estimates and competitive bids from vendors so you can demonstrate a range of costs.
Identify the scope of the investment. Will the investors be involved with your career on a short-term, project, or long-term basis? If short term, perhaps ask the investors to be involved only in a specific project (e.g., an audio recording meant for sale to the public). If longer term, then the investment may be tied into your career earnings over a certain mutually fair period of time commensurate with the dollar amount and what activities you plan to engage in with the assistance of the investment. This is sometimes referred to as a “360 deal,” which includes all of the artists’ activities. (See Chapter 4 for more about this new type of agreement.) All of these variables can be clarified by specifying the scope of the investment.
Demonstrate how you plan to pay the investors back if their involvement requires being paid back. This is discussed in more detail as we look at the various types of investments below, but at the root of your proposal is a repayment plan. Return on investment (ROI) is a significant factor for an investor to even consider backing you, and you owe it to someone supplying you with money to explain how much they could make and how long it will take them to receive their return for their investment.
Warn the investors of the risk involved in your project. Once again, securities laws may require that you clearly state the nature and severity of the risk involved with your proposal. Optimism is one thing; stretching the truth too far for the law is another. Even the greatest musical projects featuring the best artists have a chance of failing. How many times have you seen major label artists follow up a multiplatinum recording or tour with a flop? It simply happens and you are not exempt. It’s only fair to let an investor know that their money is at risk.
As you can see, a good plan is essential for your own and an investor’s evaluation of the feasibility of an investment in your artistry. It is advisable to enlist the aid of an attorney familiar with corporate and securities laws if you will be raising money with your plan—especially from people you do not know personally. The opinions and documentation that you could gain from engaging an experienced professional to help you will pay dividends when it comes to staying clear of securities violations or having to sort out investor issues down the road.
When using third-party money for your project, it is crucial that all parties involved understand the intentions and expectations of the financial arrangement. Clearly determine whether the money you are receiving is a gift, a loan, or an investment with an eye toward ownership or some kind of a financial return. This one determination is crucial in determining whether and how much the outside money source will be paid back when your project turns a profit. What follows is a very brief discussion of the types of money sources, the legal relationship between the money source and the artist, and how the money source is dealt with by an artist.
Contrary to popular belief, the custom of patronage did not die after the Renaissance. People still support the arts with financial gifts. They might be friends, family, or total strangers who simply want to see you succeed because they believe in your art. I have a friend who is not unusually wealthy and has the same day-to-day financial responsibilities that most middle-income individuals do. One day he decided that he wanted to patronize young painters. So he did. With no expectation of return on investment, he sought out up-and-coming painters whose work he enjoyed and handed them nominal amounts of money to support themselves as they pursued their art. He is contributing to the world’s culture. He is encouraging artists. Most of all, it makes him feel good.
In legal and financial terms, if you encounter such an angel as I’ve just described, the financial transaction is characterized as a gift. The money source is called a donor, grantor, or patron. You are the beneficiary or grantee. If this relationship is what the two of you have clearly agreed to, the person giving you the money is owed nothing except the courtesy of a thank you. To avoid any confusion later down the road, you might want to follow up your thanks with a thank-you card or follow-up letter acknowledging the gift and a confirmation that it is your understanding that no repayment is expected. You could show your gratitude with perhaps a “special thanks” or even some kind of title such as “executive producer” or “bankroller” in the liner notes of a recording, but that’s the extent of your obligation as long as you are both clear that you are not obligated to return the money.
If there is an expectation of repayment—either with or without interest—the financial transaction is characterized as a loan. The money source is referred to as a lender or creditor. You are the debtor in this relationship. Whether the lender is a conventional source, such as a bank that issues you a personal loan or a credit card, or an unconventional source such as a family member or a fan, the basics of loans are the same. The lender is owed the principal amount (the amount that he lent to you) plus a negotiated interest rate usually based on how much you borrowed, the risk that the lender is taking, your credit history, and how long you are going to take to pay the lender back.
Loans will often require some sort of collateral or security to ensure that if the lender does not get his money back in accordance with the terms of the loan, something of value can be sold to recover all or part of the borrowed money. Collateral can be tangible items such as recording equipment or a classic guitar collection. It can also be relatively intangible, such as the copyrights to your recordings or songs, which may or may not have value at the time you borrow the money or default on the loan. I am very protective of clients’ copyrights and advise clients not to use their songs or masters recordings as collateral for loans.
Formal or not, the terms of the loan should be in writing for all to see and understand. Most institutional lenders use relatively standard loan documentation. When using a non-traditional lender, I suggest drafting a promissory note that sets out the terms of the loan. Negotiable points of loans include interest rates, penalties for late payment or nonpayment, what kind of collateral is being used to secure the loan, and what happens in case of a default. Another negotiable item of note is whether the lender can sell or assign your loan to third parties. A third situation to consider is whether the money is provided in exchange for a portion of the proceeds generated by the project at hand. This is characterized as an investment relationship. The money source is an investor, and you are the person responsible for overseeing the investment. These investment relationships are the ones in which I see the most misunderstandings, primarily because the artist and investor failed to clarify the boundaries of the relationship at the early stages.
Time and time again, we see situations where an investor gets involved with a financially strapped artist, buying into the artist’s career for a relatively small amount of money. The artist goes on to make millions of dollars, and then there’s a dispute down the road when the investor tries to collect on the deal. Apparently, there’s some unwritten rule that says investors should not be allowed to reap the benefits of a good deal, with observers characterizing the shrewd business investment as “taking advantage” of an artist.
Distinguished from a loan or an investment relationship is that of an advance against earnings. This is best illustrated by a very common commission-sales relationship in which an employer will pay a salesperson money periodically (e.g., monthly) as an advance against anticipated commissions. As the salesperson earns commissions from sales, the advances are returned to the employer. Investors who are into creative ventures could choose to develop a similar relationship by advancing money to be paid back and then share future earnings of the business. As with loans or an investment, the advances can be secured by an ownership interest in equipment, intellectual property (e.g., copyrights in compositions or masters), or ownership in the business. In my experience, I’ve found that the investor who is willing to advance monies against future earnings in the highly speculative entertainment business is usually already in the business and knows the inner workings or is sophisticated enough to get advice as well as do the homework to make informed investments. Established record labels, publishing companies, investors, and even artists looking to diversify are willing to advance money to entrepreneurs who can prove that they can convert talent and potential into profits.
Potential pitfalls abound when it comes to negotiation of money deals. Most problems stem from the two sides being unclear or unrealistic in their expectations regarding the entertainment industry and each other. Sometimes investors who are used to putting their money in investments like real estate or traditional businesses think entertainment investments can be treated in the same manner. These investors are not prepared for the highly speculative nature of the entertainment business. Conversely, it surprises me how willing some artists are to dole out pieces of their financial pie without having any idea what that pie is worth. I often encounter artists who tell me that they “gave a point to this guy, and a point to that guy, and another point to that guy,” without even knowing that a “point” usually refers to a single percentage point of a royalty earned by the artist based on sales of a recording (see Chapter 4, Recording Artist Agreements). If the total royalty that the artist is to receive is 10 points and he “gives away” 6 of them in exchange for investment capital, he is almost sure to be disappointed when the royalty checks arrive. The solution for this lack of clarity on both sides of the fence is for all parties to educate themselves fully on what the variety of the potential income sources are before making a commitment.
Investors feel they are taking an extremely high risk and therefore deserve a high return. The source of income from which you will be paying an investor—your success in the industry—is highly speculative and cannot be guaranteed. Often, the investor will request that they have some kind of management role in your career or supervise a specific project in order to protect their investment. Before allowing yet another person into your “inner circle,” it would be wise to clarify the extent of your investor’s desire to participate in the management of your project or career. However, that doesn’t mean that your bargaining position renders you unable to negotiate. For example, you don’t need to exchange a piece of your business for the investment forever. Perhaps you could limit the investor to a piece of a specific project such as the profits of a particular recording project that the investor’s money financed. You might also consider putting a cap on the amount that investors can receive, limiting the return to, say, 20 times the amount of their investment or some set dollar figure. Another approach would be to limit the return on investment for a certain number of years instead of in perpetuity. Pull out a calculator and project how much you could potentially earn from various sales figures and then base your negotiations on those projections.
As you can see, the role of the financial person involved in your artistic career can be complicated. The best way to avoid any problems is for you to be prepared to discuss the details of your money transaction objectively. Even though the lure of someone else’s cash may make you eager to move forward, take your time and make sure the deal is right for both you and your investor.