Title: Finances In, Finances Out, and Keeping the Reins
Navigating transactions in the film industry, whether simple or complex, can be made clearer by focusing on three fundamental aspects: income, outlay, and control. Regardless of the transaction's complexity, ask these essential questions to ensure everyone involved is on the same page:
Income - Money Coming In:
- Who's the money provider?
- What triggers the contribution?
- When is the contribution due, and is it provided in full or installments or tied to milestones?
- What's the minimum contribution obligation?
- What happens if the contribution isn't sustained?
- And crucially, what happens when additional funds are required?
Outlay - Money Going Out:
Often, people immediately consider residual profit allocation (e.g., 70-30 split); however, there's more to consider before reaching that point:
- Is anyone receiving payment for services, such as management or producer fees?
- Are taxes (e.g., on "phantom income" through an LLC) covered by anyone?
- Will contributors receive interest or preferred returns on their investment? And if so, when?
- Do contributors receive their investment back first, before profits are divided? If yes, is the refund back from all income or only during capital events (like sales, liquidations, or refinancing)?
- Are there participation rewards, including box office and award bonuses, gross and net participations? Who is supposed to pay, and what occurs if obligations aren't fulfilled, like distributors failing to pay award bonuses?
- Lastly, how are residual profits allocated?
Control - Who's in Charge:
The most crucial issue to address is control. Various structures for control exist:
- Does one party have complete control, with no veto rights for others?
- Does one party have general control, but others have veto rights for significant decisions, like transactions with partners and dilution?
- Is shared control in place, requiring a collective decision for any action? Are there tie-breaker mechanisms if a tie-occurs?
- Does one party handle creative matters, while another manages finances? What happens if creative choices affect financial repercussions?
- Can control or approval rights be transferred to third parties and if so, do others have the right of first negotiation, last refusal, or tag-along rights? Can one person force a sale by everyone?
By posing these essential questions, you can gain a fundamental understanding of film industry transactions, making it preferable to ask in advance rather than during litigation.
After determining the control structure, it's important to consider how money flows in and out. For instance, who will provide the necessary funds for the project, and under what conditions will the money be released? Additionally, it's crucial to understand the allocation of funds for outlay, such as payment for services, taxes, interest, and returns on investment. This information, along with the eventual distribution of profits, should be addressed to maintain clarity and avoid financial disputes later on, and money in or out, as well as control, should be clearly defined and agreed upon by all parties involved.
