Money Matters: Don't Just Make Your Points, Define Them!
By Jeremy Juuso
Points? Points? What on earth are those things people keep promising me when I work on a film?
A friend of mine said recently she ran into a name actor at Crate & Barrel. She's a bit new to producing and had actually been pursuing this actor through mutual friends (forget about the agent and manager - too blind to real opportunity). Well, lo and behold, she approached the actor, brought up her project, and the actor said he had heard about it. They talked some more and actually hit it off quite well. In fact, they hit it off so well that during the conversation she promised him "10 points," if he ended up doing the movie.
Now, we have yet to see whether this actor will commit to the project. But apart from that, an even bigger issue looms, and it's not the one about trying to do a deal at Crate & Barrel. I ask her what she means by "10 points."
"Oh, you know, 10 points off the backend."
"And what's that?" I ask.
"You know. When the film makes money."
"Is that before or after the investors take their cut?"
A genuine thinking effort crinkles her forehead, "Hmmm, well..."
"What about the distributors? He's not expecting any of their money before they take their fees and expenses. Is he?"
"No, no, no. He'd never expect that." She doesn't say this with much conviction, however.
This scenario plays out all the time with filmmakers who venture out into the land of indie film. They make promises about points without being crystal clear on exactly what they are offering. Mostly, this is because the issue of points and what they mean can be a very confusing one.
Let's pretend that my friend, Jen, for this example's sake, gets a firm commitment from the actor, shoots her feature, and then finds a domestic distributor for North America who releases it in theaters, on DVD, on pay TV, etc. - the whole shebang. In fact, let's assume she used a producer's rep to find the distributor, and while they were at it, the producer's rep also found her a kickass foreign sales agent. The foreign sales agent takes the film to markets like AFM and Cannes and sells the film to foreign distributors attending these markets.
Next, in our fairy tale land, money flows back to the producer's rep from the domestic distributor and the foreign sales agent.
The producer's rep, John Wayne, tells her that from all of its releases into different formats (e.g., theaters, DVD, etc.), the domestic distributor collected $5 million, but is only returning $1.75 million, after deducting its fees and expenses. And he tells her that the foreign sales agent collected $900K from sales to foreign distributors, but is only returning $580K after deducting fees and expenses. As Jen starts to grouse about the high deductions, Mr. Wayne reminds her of how many films lose money and that she is actually sitting quite pretty, especially since her film only cost her $1 million to make, plus any backend commitments. "Oh snap! Backend commitments," she thinks. Mr. Wayne advises her that he'll be deducting his fees and expenses, totaling $330K, and sending the remaining $2 million her way.
Before we start handling Jen's backend commitments, let's review these numbers I just blabbed at you:
$5 million from all formats (theaters, DVDs, etc.)
minus $3.25 million in fees and expenses
yields the producer's rep $1.75 million
$900K from sales to foreign distributors
minus $320K in fees and expenses
yields the producer's rep $580K
$2.330 million total (that is, $1.75 million domestic plus $580K foreign)
minus $330K in fees and expenses
YIELDS $2 million to Jen
So, Jen made $2m (m = million) that she now has to distribute to investors, backend commitments, and herself. She starts to think about those 10 points she promised to the name actor from Crate & Barrel. (Let's call him Pacino Dinero - his real name was so abominable he opted for the best stage name available.) These points are her only backend commitment.
Even before she can think much further, she goes back to the agreement she signed with the investors to see how money would be split between the investors and her, the producer, had she not made any backend commitments. According to the agreement, it says that the investors get paid back all of the film's budget, plus another 20%, and then anything left over is split 50/50 with the investors.
What!? She breaks it down so she can understand:
1. She must pay back $1m, which was the budget of the film.
2. She must pay back another 20% of the budget, or $200K in this case.
3. Then, anything left over ($800K in this case - or $2m minus $1m minus $200K) is split 50/50 between her and the investors. So, she would get $400K and the investors would get another $400K.
Aha, without Pacino Dinero in on the deal, the $2m she just received from the investors would yield $1.6m to her investors and $400K to her. But then she starts to figure out where Mr. Pacino Dinero actually figures in all of this, and her head starts to swim. "What did I mean? 10 points? Well, obviously that means 10%. But 10% of what?" After several hours spent meditating in her 1990 Toyota pickup, three scenarios emerge:
NIGHTMARE SCENARIO: Pacino Dinero calls up and says he was promised 10% of the distributor's gross, which means 10% of $5.9m, in this case (i.e., 10% of $5m domestic plus $900K foreign). This translates into $590K! Jen calls up the distributor and the foreign sales agent, asking if they could rework their expenses to include this 10% off the top. Her calls go unreturned. Then she talks to the producer's rep.
"No way, that's between you, him, and your investors," he warns.
"My investors!" Jen runs to each of them. Their response is the same, "I've taken a bath on all eight films I've invested in, and I need to cover at least some of those losses. Sorry." Jen's heart sinks as she realizes that not even her own $400K share will cover the 10 points (or $590K) she owes Pacino Dinero.
PAIN-IN-THE-!@#$ SCENARIO: A slightly more reasonable Pacino Dinero calls Jen and says, "Great! 10 points. That means 10% of the $2m the filmmaking entity got, or in other words, $200K." Jen goes to her investors and asks if they can please just take this money off the top of the $2m, before she and they start splitting anything. The investors almost relent, but then their financial advisors intervene, saying, "A deal is a deal." Now, Jen must pay half of the $400K she made to this clown - he wasn't even that good! It was the script that made the film!
WONDERLAND SCENARIO: Pacino Dinero calls up. Jen answers, and before she can speak, the master actor soliloquizes about how he would like his $40,000. Jen smiles and gladly cuts him a check for 10% of $400K, or 10% of her share of the monies, because this is what producers most often mean when they assign points. (Points are typically taken out of the producer's share of profits.)
Luckily for Jen, all this fretting is for naught. Pacino Dinero ends up getting sued by both Al Pacino and Robert De Niro for egregious abuse of their names. Utterly distracted by the whole affair, the thespian never questions the $40,000 she hands him in backend compensation.
Let's step back into reality here. Many writers, directors, and actors have to assume the role of a producer and make their own work. The goal in doing so is to establish the kind of respect and demand for you as an artist that can fund a career. When making your own work means making an independent film - or any project, for that matter - the definition of who gets what profits is essential, whether there is money gushing in from a hit (rare) or whether there is money trickling in from a miss (most common).
In all instances, you want to promise participation from your piece of the pie, not from a piece of the pie you do not control. In the Nightmare Scenario above, Jen has no control over how much money the distributor chooses to deduct in expenses. Had the expenses been even higher, or worse, had they completely erased the return of any monies from the distributor, Jen would have been in even steeper trouble. She would have found herself having made a commitment (inadvertently, in this case) to the actor for a piece of the distributor's pie, before the distributor started deciding how much of that pie to keep for itself. The same can be said with the monies from the foreign sales agent, and even from the producer's rep. The fees for each party have been set, but the expenses are variable, as are the amounts of money coming in to cover those expenses.
On a separate, but related, note: In the land of moviedom, fees are almost always calculated as a percentage of total revenues, *before* taking into account expenses. For example, if a distributor collects $100K and has a fee of 35% coupled with $20K in expenses, the fee will total $35K, or 35% of $100K. One might think a more reasonable way to do things would be to calculate a fee based on a total where expenses have already been subtracted out. In our mini-example here, that would mean 35% of $80K, for a resulting fee of $28K. The $80K comes from subtracting out the expenses of $20K from the $100K in collected revenue. But alas, this is not so.
In the Pain-in-the-!@#$ Scenario, Jen would have been modifying her agreement with the investors after the fact. One could promise a talent, such as the actor above, a portion of the first monies to come in. That is, the actor would receive a certain percentage of any lump sum of money that came to the producer and investors before that lump was then subsequently split between the producer and investors. But such an arrangement would have to be okayed by investors beforehand, not after the talent's deal was already set. This type of profit participation arrangement, by the way, is usually reserved only for the most exceptional of talent (read: a big name star doing you a big favor by taking part in your small project).
So where does this leave us? With the Wonderland Scenario: Jen-the-producer gets a certain amount of money and has full control over what she does with it and who participates in it. This is the kind of scenario you want to be in. In other words, from the start of your project, clearly define what you mean by "points," so that there is no misunderstanding later on. Clarify, in some manner or other, that any profit participation on the backend will come out of the producer's share of the investor/producer split. And if someone tries to be unclear with you by using terms like "gross," "adjusted gross," or "net," have them define exactly what they mean. The movie business is unclear enough as it is, no need to obfuscate it further. Don't just make your points, define them!
Meet the Author: Jeremy Juuso
Jeremy Juuso is the author of GETTING THE MONEY: A STEP-BY-STEP GUIDE FOR WRITING BUSINESS PLANS FOR FILM. He is also the founder of Jeremy Juuso Consulting, a firm specializing in the writing of film business proposals, publication of film data, and education of investors on the basics of the movie business.