The million dollar question is how to fully fund your multi-million dollar film (making it in Ottawa, using our great crews and actors, is the easy part). The short answer is a combination of tax credits, cultural “funds”, pre-sales or advances/guarantees of sales, equity and reinvestment or deferral of fees. Let’s take a look at “equity”, and in particular the question of how to pay back your investors when the film is a big success. It would help to have this answer well-formed and on the tip of your tongue when speaking with potential investors.
The two common, and related, answers are “shares” and “points”. Shares means that an investor becomes a shareholder of the single purpose production company set up to produce the film. Points means that an investor receives a percentage of the film’s net proceeds (each point is 1%). You might suppose that shares and points are linked or even that they are the same thing. They aren’t. Simply being a shareholder of the production company does not mean you get any cash. First, the production company might never make a profit; second, if it does make a profit the majority shareholders might decide not to pay the profit to the shareholders (to declare dividends).
What about points? How are they calculated and paid? The typical lawyer response is… it depends.
Calculating points generally starts with defining the “gross receipts” from the exploitation of the film. This definition might be all sums derived by or on behalf of the production company from the exploitation of the film, in all media and from all sources, worldwide, in perpetuity, after reasonable and customary third party sales fees and expenses.
Next comes the calculation of net receipts – gross receipts less expenses (permissible deductions). Generally, gross receipts are paid into a bank collection account administered by a third party collection agent. Whether Freeway Entertainment, Fintage House or any other collection agent, this is the independent party that collects, administers and disburses the film’s gross receipts. The details of how those funds are disbursed are outlined in the film’s collection account management agreement. Not surprising, the first permissible deduction from gross receipts is the fees and expenses of the collection agent. After they are paid, the balance of funds are used to pay the following expenses, among others:
– Repaying lenders in full for their production financing loans plus interest and fees;
– Box office bonuses to featured actors when box office revenues hit certain milestones (sometimes used to entice an A-list actor to come on board the film);
– Union residuals (for example ACTRA, DGC and WGC, if applicable);
– Specific costs not included in the production budget (marketing, audit fees, etc.); and
– In some cases, repaying investors in full for their investments plus their pre-determined premiums.
After the expenses are paid in full, any funds remaining are the “net proceeds”. It’s these net proceeds that are distributed to those entitled to participate – according to their points. The total of 100 points are often split in half – 50 for the producers and 50 for the investors. In this scenario, generally, the points allocated to other parties come from the 50 points retained by the producers. Those other parties might be the film’s lender, director, writer, lead actors, and key members of the crew, who have often worked for a lower than normal fee in return for a share of the backend, which is another way of describing points. For some strange reason, it’s not the norm for lawyers to receive points …
A common name for this entire cascade of entitlements – from gross revenue through to the individual shares of net revenue – is the “waterfall.” As you can imagine, by the time the water falls to the lowest level, it can be little more than a drip. As someone famous once said, don’t go chasing waterfalls, if you can get your fees out of the budget.
Edwards PC, Creative Law is a boutique law firm provides legal services to Music, Film, Animation, TV, Digital Media, Game, Software and Publishing industry clients. For more information and blogs, please visit www.edwardslaw.ca
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* This blog is for general informational purposes only and is not to be construed as legal advice. Please contact Edwards PC, Creative Law or another lawyer, if you wish to apply these concepts to your specific circumstances.