Before you can
negotiate your own deal as a producer, you should have a strong understanding
of how revenue waterfalls work and how the future "pie” can be split up. Here we provide some rough outlines
of how money often flows through a production. There are standard players
involved, and their placement in the revenue waterfall is often similar.
The EXHIBITOR is the theatre or
theatre chain that sells the movie ticket to the customer.
The DISTRIBUTOR is the company that
normally provides "P&A” (prints & advertising—a bit archaic since the
advent of digital cinema) and then connects the PRODUCTION COMPANY
to the Exhibitor.
The Distributor also connects to:
• TVOD companies (Transactional Video On Demand,
e.g., cable VOD, iTunes, Amazon, Google Play, etc.)
• SVOD companies (subscription-based VOD, e.g.,
Netflix, Amazon Prime)
• AVOD companies (advertising-based VOD, e.g.,
Crackle, Hulu, Maker)
• PAY TV companies (HBO, Showtime, Starz, Epix,
Increasingly, ISA (International
Sales Agents) often function as Distributors, making the line between the two
There are many differences between
studio financing and independent film financing. But either way, you will
likely be interested in finding equity investors.
When you’re courting investors, the
ideal scenario is to secure sufficient equity funding for the full amount of
the film’s budget. This is rare, especially as budgets get bigger. Often a film
will raise a substantial fraction (25% to 60+%) of the budget in equity from
private investors, and then use that to secure the "package”: script, director,
producer colleagues and, most importantly, the stars.
At this point
an ISA can do "presales,” taking three to nine or more months going to the
major film markets (AFM, EFM, Cannes, etc.) and getting minimum guarantees
(MGs) from buyers in countries worldwide. These buyers agree to book the film
at a discount; buyers who wait to see the completed film could pay more. A
producer might then get financiers to "cash-flow the MGs,” giving your project
a loan against those sales contracts as well as against any expected
state/provincial/national production incentives or tax credits. Finally, other
higher-risk financiers might provide any necessary "gap/mezzanine financing,”
giving your project a higher-interest loan to cover any part of the film’s
budget not covered by equity, MGs and tax credits. Once everything is in place,
you can consider your picture greenlit.
When it comes to the deal with your
equity investors, virtually anything goes so long as you follow the rules of
the SEC (U.S. Securities and Exchange Commission). You’d be wise only to pursue
accredited investors who can demonstrate they are "high net worth individuals.”
There’s greater liability when taking investments from unaccredited investors.
Almost no two investment agreements
are exactly alike. But there is a "Standard Deal” structure that’s reasonably
popular, for low-budget films in particular. It can be succinctly explained as
"After Payback, Hurdle Rate, then Split
into Two Pools”.
It works something like this:
a) 100% of first revenue to the
Prodco/project (assuming all project’s costs, obligations to unions, loans,
sales agents, etc. have been paid) first pays back investors’ principal pari
passu, which means pro-rated on equal footing. (Exception: Gap or mezzanine
financiers will typically be paid at a higher negotiated rate.)
b) Then subsequent revenue pays
investors a one-time "Hurdle Rate” (aka "Preferred Return”), often between 5%
and 20%, for the entire duration of the investment (i.e., not compounded annually).
c) Then any remaining
revenue/proceeds is split 50/50 into two pools: the "Investors’ pool” and the
- Investors are paid pari passu
from the Investors Pool.
- Producers, director, actors and
other profit participants receive "upside” in the form of proceeds from the
Producers’ Pool. Note that the 50/50
split assumes that the team in the Producers’ Pool is working for discounted
rates, which are thus balanced by a substantial share of the back end. Some
equity investors may require a 55/45 split, or even up to 70/30, but in that
case the team should get paid their full rate for weekly full-time work.
Another structure can be described
as a "Revenue Corridor Split,” whereby funds flow in and are split into
different "corridors” (percentages), which can change according to milestones.
For example: First revenue to the
project (after all costs, etc.) is split so 80% goes to the Investors’ Pool and
20% to the Producers’ Pool, up until the investors are paid back their entire
principal + their Hurdle Rate.
Any remaining dollars are then split
50/50 between the two pools. This way, the "corridors” ensure that at least
some initial revenue goes to the non-investor profit participants in the event
the project earns money but not enough to make the investors whole. It’s a
useful means of addressing the concerns of profit participants skeptical that
the film will earn enough revenue to make worthwhile a late placement in the
budget films (say, more than $20 million), producers often employ a very
different structure whereby the split tilts more heavily to the financier’s
favor due to the greater risk of losing very substantial amounts of money.
Alternatively, profit participants might receive a schedule of bonuses based on
box office milestones, or simply a smaller percentage of the gross revenues
instead of a share of a Producers’ Pool. Producers, directors, stars and other
profit-participants might agree to this because those percentages may yield
considerably greater returns if the film becomes a blockbuster. The bottom line
is that there are a thousand ways to structure a contract, and each has its own
pros and cons. Having a good attorney to work through the process with you is
|($30 million film budget that earns $150 million in Worldwide Theatrical Box Office)|
*Click for full version. Also attached at bottom of article
BOTTOM LINE RECAP: >>>
All Media WorldWide Gross Revenue = $240 Million
Work 2 to 5+ years for… >>> Lead Producer’s Profit Participation Share =
Splitting the Future Pie
The bad news is that in the indie
world, many films lose money. If you’re using the standard structure, you
should be prepared for your points to end up worthless. Consequently,
filmmakers may want to include a profit-participation "floor” in their contract
to guard against notorious "Hollywood accounting.” That agreement should be
coupled with strong auditing rights, giving the producer the ability to fully
audit the books, initially at her own expense, at least once per year. Insist
on serious penalties should the distributor ever underpay by more than 10%
(perhaps reimbursement of the cost of the audit plus triple the
How should you split up the pie?
There are some standard ranges to consider.
SAMPLE PROFIT PARTICPATION in the "PRODUCERS’ POOL”
Assuming budget under $5M:
• "Produced By” Primary/Lead Producer: 10% to
40% (often 20%) depending on development expenses
• Director: 2% to 15% (often 5%)
• Writer: 1% to 10% (often 5% if not WGA)
• "Name-Above-the-Title” Actor: 3% to 20% (often
• 2nd Name Actor: 1% to 10% (often zero)
• 3rd Name Actor: Zero to 5% (often zero)
• Name Cameos/Rest of Supporting Cast
Collectively: Zero to 10% (often zero)
• DP: Zero to 5% (depending on if he/she cut
• Editor: Zero to 5% (likewise)
• VFX/Other Key Dept. Heads Collectively: Zero to
5% total (likewise)
Other Producers, Collectively (i.e. not
Executive Producers/financiers): 10% to 20%
• Line Producer: Zero to 5%
Executive Producers: 1% to 5% of the
proportion of investment they bring in
• Entertainment Attorneys: Zero to 7% (often zero
if not discounted rates)
Packaging Agents: 1% to 5% (only if they provide three or more major
Remember, this money is paid
separately, out of the Producers’ Pool, not from the gross revenue to
Lawrence Abrams produces feature films (including Mining for Ruby)
and television (including the Emmy-nominated The Writers Room on Sundance Channel). Special thanks to
Stephen Marinaccio for his assistance in preparing this feature.