by Tony Berman
If you’ve ever been hired or hired someone to perform creative services or to create an artistic or technical work, either orally or by signing on the dotted line, this is an article you should read.
- Whether the deal terms are straightforward or complex,
- Whether you’re dealing with your best friend or a faceless corporation and
- Whether the negotiating process is informal or formal –
this article will give you a FRAMEWORK for thinking about what terms are crucial to you and what is open for discussion.
This framework is applicable to deals involving copyright, trademark, patents and publicity rights – essentially the entire spectrum of intellectual property.
In short – if you buy, sell or trade creative services or works, and the very thought of negotiating a deal gives you a massive migraine, you need a simple way to organize the deal points in your mind.
In addition to some aspirin, you need perspective and context.
You need the Three C’s.
THE THREE C'S
The Three C’s are:
2. Creative Control
Ok – so there are really four C’s, but “The Three C’s” is much easier to remember.
If you think about nothing else when entering into a written or oral agreement with someone for creative services or works, think about the Three C’s.
The most important aspect of the Three C’s is how the “C’s” relate to each other.
Individual deal points never exist in a vacuum; in any given situation, the parties may each place more or less importance on specific terms – and in negotiations, the parties will give up certain rights or benefits in order to receive other rights or benefits.
Think of the Three C’s as a framework for thinking about this give and take.
For example, if compensation terms are of utmost importance to you, think about giving up some creative control of the project or limiting how much credit you need to receive for your work.
If maintaining your creative control over the project is vital, think about taking less money or limiting how much credit you receive for your work.
If having your name associated with the project is crucial, think about taking less money or giving up some creative control.
Finally, within each “C” – think like a journalist or detective…ask yourself “what,” “when,” “where,” “how,” “how much,” and even “why” to try to cover all the angles of the subject.
HOW MUCH? This is usually the first question people have when they think about compensation. And of course, “how much” is not something you’re likely to forget about when negotiating an agreement for creative services or works.
But there’s a lot that can go into pricing, and often the price is the deal-breaker in negotiations. Thus, the “valuation” of the goods or services is vital in every deal.
If the deal is for services, either the hiring party or the hired party or both will need to know every aspect and task making up the services in order for both parties to come to a decision about the value of those services.
If the deal is for goods, knowing what the goods are, what is included with them, and what is involved in procuring and delivering them will help both parties come to a decision about the value of those goods.
There are several good methods to determine an appropriate valuation for services.
If you are the hired party and you have provided comparable services for another hiring party, you can use that deal to determine the compensation you will ask for in the present deal.
If you are the hired party and you know what the hiring party has paid other service providers for comparable services, you can use that deal to determine the compensation you will ask for in the present deal.
If none of the above methods are available, but you know what another hiring party has paid other service providers for comparable services, that can be useful in determining the compensation you will ask for in the present deal.
But remember – there’s more to getting paid than simply “how much.”
WHAT? There are 2 “what’s” in compensation:
1. What is the form of compensation?
2. What is being bought/sold?
As for the form, compensation can be cash (in hand, or deposited into a bank account or PayPal account), credit or equity.
Compensation can even be non-existent if the goods or services are given away for free.
However, remember that both parties must generally give “consideration” in order to form a binding contract. Essentially, this means that both parties have to give up something to the other.
Also – if paid in cash, what currency will payment be made in?
As for what is being bought, it is paramount that both parties understand exactly what the money is paying for. Think back to the notion of “valuation” above.
For example, a writer for a television production company may want to ensure that the valuation of his compensation takes into account new revenue steams, such as DVD sales and internet distribution.
HOW & WHEN? The “how” and “when” of compensation is the payment structure, and there may be more options here than you realize:
- Flat Fee
- Deferred Fee
- Milestone Payments
- Royalties / Revenue Split
- Vesting Ownership / Equity
Also sometimes referred to as a “project fee,” this is the most straightforward way to get paid. It is an all-inclusive payment for a good or service.
As for the “when” of flat fees, consider whether the fee will be paid entirely up-front, entirely upon completion of the project or sometime in between.
If payment will be made (at least in part) upon completion of the project – when exactly will the project be deemed “complete”?
Also, if the service is performed or the work is delivered – does the hiring party have the right to withhold some or all of the payment until they formally “approve” the service or the work?
If so, it is important to establish objective criteria for approval, such as meeting certain well-defined specifications, rather than a purely subjective standard.
Moreover, an accurate valuation of the goods or services will give specific answers to the questions “what is being bought/sold?” and “how much?”
From the hired party’s perspective, using a flat fee can be very convenient and attractive to hiring parties, who in turn will also be attracted its simplicity.
However, having an informed idea of the value of the goods or services is vital because once the flat fee is agreed upon – the hired party typically cannot get further compensated for problems or setbacks that may crop up along the way, problems which may cost the hired party unanticipated time and money.
If, for example, a session musician commits to a project that is anticipated to require two days of studio time on a flat fee basis, that flat fee will not increase if creative differences between the star performer and producer prevent the project from being completed in the anticipated two-day timeframe.
Sometimes the parties may agree that all or part of the fee may be deferred until a defined point in time.
The key word in the preceding sentence is “defined”.
For example, the hired party’s fee may be deferred until the hiring party enters into a distribution deal or receives funding.
The other important point with deferred compensation is to have clarity as to the priority of payment of deferred payments.
If the hiring party has deferred payment to numerous parties, the hired party would like to be at or near the head of the payment line when the defined payment time occurs.
Additionally, the hired party may require that a “premium” be paid on the deferred amounts.
For example, if the agreed fee is $10,000 and
$5,000 of that is deferred, the hiring party may ask that the deferred
amount be increased to a higher amount.
Think of milestone payments as flat fees for individual parts of a project.
Milestone payments can be a helpful way to structure payment when projects can easily be split into smaller, unique parts and/or when projects will take some time before completion.
In both situations, the hiring party may not feel comfortable paying large amounts up-front before any work is completed, and the hired party may not feel comfortable getting paid on the back-end after all the work is completed.
Milestone payments act as a kind of compromise, ensuring that the hired party continues to move toward completion of the project and also ensuring that the hiring party is paying along the way.
Milestone payments can be calendared to the actual completion of individual aspects of a project, or calendared to specific datesc .
If calendared to completed parts of a project, it is very important that both parties have a clear understanding of what “completion” means.
Will the hired party deliver something upon completion?
Will the hiring party have the right to approve or reject what is delivered?
Another way to pay or get paid is based on a percentage of revenue.
In many ways, the revenue split (or “royalty” in the music business) is the opposite of the “flat fee” payment method.
In the flat fee method, the hired party’s compensation does not depend on how valuable the good or service is over time to the hiring party.
Think of the flat fee as a snapshot of value in time. Think of the revenue split as video of the value over time.
In the revenue split model, the more money the hiring party receives from the good or service from its customers, the more the hired party makes as well.
Conversely, if the good or service tanks once in the hands of the hiring party, the hired party does not benefit.
For this reason, both parties (but especially the hired party) should consider coupling the revenue split with an advance.
A revenue split with an advance means that the hired party receives an upfront payment of cash (the advance), followed by the agreed upon percentage of revenue.
However, the hiring party will not begin paying out the revenue split until it has recouped the money it paid out as the advance.
When negotiating a revenue split, there are a few other important factors to consider.
First, and most important, is the revenue split based on “gross” or “net”?
Gross revenue is all revenue received for the particular good or service. Net revenue is gross revenue minus expenses.
Does revenue include ancillary sources of revenue?
If you write a screenplay, are you entitled to any participation in sequels, remakes, merchandise, novelizations, theatrical adaptations, etc.?
If you sign to a record label, is revenue derived from sales of CDs and downloads only, or does it include merchandise sales and touring income?
This is a crucial point to explore, especially as the internet continues to impact traditional revenue channels.
From the hired party’s standpoint, getting a cut of gross revenue is ideal.
The hiring party, however, will usually want to deduct their expenses before tallying the payout.
In fact, the hiring party will want to include as many of their expenses as possible in these deductions, while the hired party will want to limit these deductions.
In a “net revenue” split situation, both parties should be absolutely clear about what expenses are being deducted before payout to the hired party.
Second, how long will the revenue split last?
This sharing can go on for as long as the parties want, and the duration of this period can be another point for negotiation.
Third, what territories are included?
Does the split apply only to revenue earned from U.S. sales? Sales in the U.S., Canada and Mexico? The European Union? Africa? Asia?
OWNERSHIP / EQUITY.
Typically, the revenue split does not mean that the hired party is a part owner of anything. It simply means that they are entitled to a percentage of the revenue earned.
However, offering ownership is yet another way to compensate someone.
An ownership stake may be given in a good or the product of a service sold.
For example, if Party A hires Party B to write the lyrics to a
song – instead of or in addition to giving a royalty on revenue from
the song, Party A may decide to split the ownership of the song 50/50
with Party B.
An ownership stake may also be given in the hiring company itself.
For example, if record company Hot Tracks wants to bring on the exclusive services of a platinum sales-generating producer, that record company may offer the producer some percentage of equity in record company to ensure the producer releases his best work on Hot Tracks.
FREE - NO PAYMENT.
Of course, one compensation possibility in any deal is for the artistic works or services to be provided or performed for free.
Certainly this is not uncommon, especially in an industry where establishing a name and getting the art out to the public is a young artist’s primary goal.
Remember, though, when signing a contract for the deal – there generally must be “consideration” for a contract to be valid and binding. This means that both parties give something up in order to receive something.
Consideration can come in many forms, but money is the most typical.
If a hired party is not getting paid for the goods or services being provided, there must be some other form of consideration besides money in order for a contract memorializing the deal to be valid.
In short, the hired party must be compensated – if not with money than with something else, such as ownership.
As you can probably imagine, all of these compensation methods can be mixed and matched to create an optimum payment structure for the deal.
For instance, the goods or services could be provided with payment based on milestones as well as an advance on a percentage of net revenue.
It should be noted that there are myriad ways to compensate someone other than giving them up-front / back-end cash or equity, including paying for expenses or providing medical benefits.
Both parties should consider how much creative control the hired party will have before, during and/or after the artistic works are being created or the artistic services are being performed.
Questions to consider include:
- Who has creative control over the project – the hiring party, the hired party or both?
- What is the scope of creative control? (i.e., How much creative control?) For the entire project, or only for specific parts? For both substantive and superficial aspects, or only superficial aspects?
- For how long do the parties get creative control? Throughout the project, or for a specific time period?
Creative control also has a symbiotic relationship with credit.
If you create a work for another party and that party changes your work, if you are not able to contractually approve those changes will you have the right to remove your credit from the work?
The threshold question for this “C” is whether the hired party will receive ANY credit for work done.
If the answer is no – the hiring party may want to consider offering additional benefits, either in terms of compensation or creative control.
If the answer is yes – the next step is to determine: What language will be used to attribute credit to hired party.
Typically this involves determining 2 things:
1. What name will the hired party go by? For instance, their real name, their pseudonym or their company name.
2. What language will attribute the artistic works or services to the hired party’s name?
Next, the location of the credit must be determined.
When an artistic work is created – credit can be affixed to the work itself. Think of an actor’s name appearing in the opening scenes of the movie itself.
For both artistic works and services – credit can be affixed to all ancillary aspects, such as advertising, promotional, marketing and sales material associated with the works or services.
For ancillary materials – the parties should be clear on how credit will be treated in various media outlets.
For instance, credit may be handled differently on billboards versus newspaper movie listings, television and radio spots, internet banner ads and airplane sky-writing.
For all aspects of this “C,” size and placement are key issues.
For example, even if a record label and a producer agree that the producer will receive credit on the album jacket and in advertisements in all media, if the “Produced by John Smith” is in 1.5 font off to the side – the producer may be understandably upset.
Territory is something else to consider in terms of credit.
If the goods or services will be sold or provided outside the United States, the parties will need to agree on credit in foreign languages, foreign media and foreign products.
THREE C’S & EMPLOYMENT RELATIONSHIPS
How the 3 C’s align between the parties is often connected to the overall relationship is one of employment or independent contracting.
For instance, in an employment relationship it is more likely the hiring party will have ultimate creative control and is not required to give the hired party any credit for the work.
On the other hand, in an independent contractor relationship the hiring party may have less creative control and is more likely to give the hired party credit for the work.
Read our article “Copyright: Works For Hire” (INSERT LINK) for more insight here, but suffice it to say that how the parties allocate creative control, compensation and credit can have enormous effects, especially as to the ownership of the resulting artistic works and the intellectual property associated with them.
Just as individual deal points don’t exist in a vacuum – neither does the interrelation of the Three C’s.
In the vast majority of deals, one party has more bargaining clout than the other party – and just because the weaker party gives in on one or a few points does not necessarily entitle them to more favorable terms on other points.
But having an understanding of the possibilities and permutations of this give and take could itself affect the balance of power in a deal.
Knowing what’s a “must have,” what’s a “would be nice,” what’s a “don’t need,” and what’s a “can’t get” is the first step in getting the most out of any deal.
This knowledge is a kind of power in and of itself, and the Three C’s are your road map to getting there.
Thanks to Howie Cockrill for his contributions to this article.
(picture from Artegami.com)