Business, Filmmaking, Fundraising
4 Facts You Need to Know about Profits for Your 1st Feature Film
June 23, 2018 - Business, Filmmaking, Fundraising
Money matters can be quite complicated…
…and I aim to sort them out in a comprehensible manner to help you get ready to launch a bigger project (such as your first feature film).Just like with securing film distribution, I’d never handled any of these matters prior to producing my first feature film. The university of life taught me how this stuff works – plus some input from mentors.
I must mention that while I have learned a lot from my experiences thus far, there are many things in regard to investing that I do not understand and have not encountered.
This is only a basic breakdown of how your film’s profits will break up if seeking some investment or when sharing profits with your team.
It’s important to understand what people expect, what they are talking about, and what your obligations are once you’ve made promises of giving any amount of ‘profit’ or ‘ownership’ of your film to anyone, and what you’ve really promised to share with them.
Since there are a handful of terms in this article that not everyone may be familiar with, I’m going to define a few things before we get started.
Super-exciting definitions you can (but shouldn’t) skip
‘Points’. This is the common term for profit participation percentage points.Profit participation (how much of the profit a particular person or party receives when the film makes money) can only be out of 100 percentage points, which is where the shorthand ‘points’ comes from.
Gross profits. Gross profits, according to Investopedia, is “the profit a [film] makes after deducting the costs associated with making and selling [it].
Gross profit will appear on a company’s income statement, and can be calculated with this formula:
Gross profit = Revenue – Cost of Goods Sold
This is a generic business definition of gross profits, commonly referred to simply as ‘gross’.
Within the film industry, gross is commonly understood to include all costs of producing a feature film, including prep, production, and post, but not usually including other expenses such as marketing, also known as print and advertising (‘P&A’), production company overhead, miscellaneous company expenses, or other costs not directly attributable to the production of the film.
I know. This stuff is boring, but it’s important, so keep reading!
Net profits. Commonly referred to as ‘net’, Investopedia defines this as, “Net income (NI) is a company’s total earnings (or profit); net income is calculated by taking revenues and subtracting the costs of doing business such as depreciation, interest, taxes and other expenses…”
An important element to note is the part of the definition that says, “…and other expenses… “
Oh… What could that mean? The truth is, ‘other expenses’ can be anything a company decides is part of their operating expenses of one sort or another. This is something you have to watch out for when dealing with people.
You need to make sure the definition of net profits is clear.
Generally, the definitions of gross and net profits can change depending on with whom you make deals. Whatever the case, it’s important that everyone is totally clear on their expectations and define things clearly.
Fixed and contingent compensation. “Fixed compensation is the upfront money that is paid [to cast or crew] when the film goes into production, regardless of what happens to the movie in the distribution phase. The contingent compensation is the percentage of a pool called the ‘producer’s adjusted gross.’ Today, virtually all films produced include some form of contingent compensation.”
(by producer Kathryn Arnold on HG.org)
When it comes to your first feature film, you will, in all likelihood, use a lot of contingent compensation, since you don’t have much (if any) up-front payment you can provide.
These terms are relevant because any ‘points’ you give to key cast and crew for their help are a form of contingent compensation. While there are ways to use this method of compensation in a professional manner as well as ways to do this in a manipulative manner, there is nothing inherently wrong with contingent compensation.
Tricky terms. Sometimes, there will be some tricky terms out there that look like something they are not.
This is where having good mentors or a good entertainment attorney can really come in handy. For example, ‘adjusted gross proceeds’, or ‘modified gross proceeds’ are other ways to basically say net profits, in my opinion.
My knowledge and understanding of accounting/economic terms and concepts are limited and imperfect, so I recommend you do some research on your own to learn more. If you want to look at some more definitions, I found this interesting sheet of info.
Ownership versus profit participation
Big difference!While I am not a lawyer, I know that there’s a difference between signing an agreement that says you are giving someone ‘5% of the film’ or ‘5% ownership of the film’, and an agreement that says you are giving someone ‘5% of the film’s net profits’ for their help, and then defining net profits.
Always be careful what you sign.
I almost made this mistake, since I didn’t make that distinction.
The difference is this: owning your film is owning the intellectual property (the script, the ideas, the creative input) and rights of the physical images, voice recordings, and images of the actors. Basically, everything that makes up what the film actually is.
If you give someone some of the film’s profits, all you owe them is a certain amount of money based on what the film makes.
What you want to do with their money to spite them is another issue entirely. You still have all the rights to the film and they don’t get any say in what you do with it.
I almost signed away some of my film’s actual ownership to some people who worked on my film. Oops. Don’t be like me – pay attention and make a distinction between these two things.
Structuring your project – who gets what
So, let’s say you’ve found a partner with whom to make your film. You’ve also found someone who is going to contribute a bit of funding to your film, in addition to whatever you and your partner contribute.This is a sample scenario for someone making their first film. You couldn’t find someone willing to give you a ton of cash, but between yours and theirs, it’s enough to get something off the ground.
Before you get to that point, you’re going to have to decide how you’d like to allocate the net profits of your film – the ‘points’. Having a plan will allow you to negotiate with people properly when it comes to their contingent compensation.
You’ll know where you intend to allocate things, how much you’ll have if you offer someone ‘x’ amount, what number of points you want to reserve for yourself and investors, and how much you can realistically give away.
Above, I’ve included a sample breakdown of your film’s points. Assuming a lot of people involved in your film are working for very little up-front cash, it is common to offer them a reasonable amount of points in exchange for their work.
What ‘reasonable’ means will vary and be based upon that person’s apparent worth given their skill and how valuable their time is. Okay, from the top-down, let’s break these numbers down.
The executive producer (EP). The big cheese. Whatever the case, they are offering something so valuable to your production (whether money or resources) that they earn this title along with a substantial chunk of your points.
The amount they receive will be entirely between you and them, but based on my limited experience, it seems likely for this number to be anywhere between 20-50% and depends greatly on how much they are contributing compared to you.
You and your producing partner. This is, of course, assuming that you do have a partner. In a prior article, I suggested that you should find someone with whom to co-produce your first film and how to find a great partner.
If you don’t, this is easy. Give yourself as many points as you realistically can, while treating your cast, crew, and backers fairly. If you do have a partner, on the other hand…
You and your partner are going to have to have a candid and transparent discussion about who will be doing what, how much work each person will be doing, and what they are bringing to the table. Basically, you have to come to what you feel will be a fair arrangement for both of you.
Whatever you decide, make sure you are satisfied with the agreement. If you feel troubled about what you’ve agreed to, bring it up. The last thing you need is to be harboring any feelings of bitterness or resentment toward your partner several months into making the film.
For my first feature film, my partner and I decided on even responsibilities and an equal split.
From left to right: Michael Alvarez (one of our actors), Joseph Mbah, and Nick LaRovere The stars of the show. For my first feature film, we offered those that were committing a significant amount of the time to the film, the lead actors, a few points. We based the amounts on what we gave others for the same level of commitment. I believe this is only fair, especially if your actors are working for no upfront cash payment.
Your crew, your team. Like your lead actors, the crew that is dedicated to seeing your film through is deserving of at least a reasonable offer of points for their assistance.
If the crew is being paid normal rates, then you probably don’t have to be concerned about offering points. However, on your first feature, chances are you will not be able to offer full rates for anyone.
Composer, Writer, and more. There may be others that are willing to assist you with your first feature that are seeking experience and are therefore willing to work for points alone. It is up to you and that person to negotiate a number of points that seems appropriate for the level of work they are contributing.
An example of points structure: The EP contributes $5,000. You and your partner contribute $2,500 each.
Perhaps your EP gets 25 points, and you and your partner get 12.5 each. However, you realize that since you and your partner not only helped fund the film, but also will spend countless hours prepping, shooting, and in post, you increase your allotments to 20 each. The remaining 35 points are split up to everyone else as you choose.
Hold some back. I recommend not giving away all your points up-front. You may encounter a situation where it’d be helpful to offer points to someone.
This might be in exchange for an otherwise un-securable location, expensive equipment lent to you, or any other unforeseen assistance that may need a bit of grease on the wheels to get things moving.
What money goes to who, and when?
Great question. This will depend on what kind of deals you have arranged with all participants in your film, especially the distributor and financier(s).There are, in reality, many different types of deals and each will have its own peculiarities. Who receives what payments, and when, will vary, as all these sorts of things can be written into a contract. However, for the most part, it will probably go something like this. In terms of priority…
You may be wondering why the distributor gets first priority in this scenario. Didn’t the outside investor take on the most risk by investing in someone’s film (that isn’t their own like it is yours)?
Most likely. However, from what I’ve learned, it is quite normal for a distributor to require they recoup any marketing or direct costs of distributing the film before any funds are disbursed to other parties.
Here’s where your profits go when there’s a typical distribution deal:
What is the distributor recouping?
In reality, the definitions of ‘marketing and sales costs’, or ‘costs of distribution’ can mean almost anything at all. This is an unfortunate problem with this distribution process.
Your best bet, in my current view, is to get an honest distributor. Unfortunately, you don’t control that, but you can do your best to work with someone who seems to work honestly if you get multiple distribution offers.
Marketing caps. Since a distributor will be pushing your film, they will incur expenses, perhaps every year, as long as they have the contract. So, they may include a marketing cap which encompasses all expenses, such as traveling to Cannes Film Festival, the American Film Market (AFM), and other popular sales locations.
It’s important that there is a marketing cap in your distribution deal. Otherwise, if the distributor gets ‘marketing and sales costs’ taken off the top of the profits before anyone else gets anything, they have no limit or accountability as to how much they spend in that category.
An arrangement without artificial limitations may lend itself to some creative accounting. What is ‘priority’ or ‘first-money return’ of investment? This concept simply means that your EP wants to get their investor paid back to them first before anyone else (aside from the distributor) gets anything. Since ordinarily, they are the primary 3rd party risk-taker on a film, this seems like a fair arrangement.
The EP should be reimbursed monetarily for his or her initial investment before anyone else is paid since they have nothing but a monetary stake in the project – unlike you.
When do you get paid anything? Well, unless you arranged something different with everyone else that received points, after the distributor has recouped their marketing costs (reached their cap) and after the investor has been paid back their initial investment, the percentages of net profits will be split evenly and without priority to all parties.
Reporting what the film makes. In your deal with a distributor, you should be promised by them that they will report what the film is pulling in, at least every year (for a limited time) if not every 6 months.
After that, if it isn’t already in your contract, it’s a good idea to share those reports with your EP (at the least) for the sake of transparency and good business, as well as any other major points-holders.
If those holding few points on your film trust you, chances are they won’t mind not having those numbers shared with them, as long as they are getting checks in the mail.
Otherwise, you should let them know that the film simply isn’t making money (which is an unfortunate possibility) so they don’t have any unrealistic expectations.
Movie profits in a nutshell
1. Definitions:‘Points’. A common term for profit participation percentage points.
Gross profits. The money the film makes, aside from the costs of making it and getting it to a distributor.
Net profits. The money the film makes after marketing and sales costs of the distributor are subtracted.
Fixed and contingent compensation. Fixed is the up-front cash you pay people. Contingent is money they are promised on the back-end, including points.
2. Ownership versus profit. Remember that these two things are not the same. Ownership implies having rights to the film itself in some way. Profit is just money.
3. Structuring your project. Have an understanding of where all your points are going, who is contributing what, and divvy the points out carefully.
4. What money goes to who and when. Every deal structure will be different, but remember that the money being made on the film most likely won’t be for you, at least not at first. Make sure you handle the funds appropriately and pay the right people.
5. Additional resources: A wonderful, but more complicated breakdown of where the money goes in a film deal: read the breakdown HERE.
More definitions, including many terms I don’t understand, HERE.
So, feel ready to make a feature film yet? No? That’s understandable.
You may never feel ‘ready’.
Keep that in mind, keep learning, and working hard… Good luck!
Author
Entrepreneur & Storyteller. Co-founder of Occulus Films. I love working with teams to create compelling and engaging films and commercial video content. Fave films include Blade Runner and Mad Max: Fury Road.
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