Recording Contracts - Getting Started in the Music Business
The larger the label or publisher, the less likely your chances that they will listen to a mp3 or compact disc that you send to them unsolicited. In fact, many majors will return the envelope to you unopened with "refused" written on it.
At the very least, you should call the label you're interested in and ask the receptionist if they accept unsolicited material. If they do, ask for specific instructions on how best to submit it, and to whom it should be submitted.
Rather than mailing out unsolicited demos, etc., to major labels and publishers, it's better to try a grassroots approach to gaining their interest first so that you are more attractive to them.
Ask yourself, if I was an A&R representative at a major label / publisher, what would I look for in a prospective signee?
1. demonstrated ability to tour; quotes from club owners added to your bio / website;
2. band has created a website that has easily accessible contact information (i.e. management, publicist, publisher, booking, etc.); band has an email list; has at least 1,000 members / email addresses;
3. band has created a Facebook page that has at least 1,000 "fans";
4. band has created a Youtube profile that contains all of their videos (live video recordings should have high quality sound);
5. band has an excellent promotional pack that is easily accessible through their website;
6. all songs (Form PA) and recordings (Form SR) fully registered with US Copyright Office;
7. affiliated with BMI, ASCAP & SESAC and maintain working relationship with your Writer / Publisher Relations representative;
8. band has registered their band name with the US Trademark Office;
9. released a demo or first record; retain sales records that demonstrate band's ability to independently and successfully market and sell their recordings;
10. positively written about in internet blogs and local, state or national publications;
11. performances at high profile music conferences such as CMJ, SXSW, NXNE, etc.
Even if a label or publisher won't accept your CD, that doesn't prohibit you from mailing them copies of reviews, sales sheets, radio airplay lists, etc., that show your commitment to achieving success and your desire to contact them.
Always cultivate any label contacts you make on the road while touring. If there are specific record labels that seem like a good fit, try to book performances with artists already signed to that label. This is an excellent way to build strong contacts, especially with smaller independent labels. Independent labels often depend heavily on their own bands and artists to act as informal A&R scouts.
There are several levels of a "demo deal". You can make a deal with a record label that will finance a small recording project to see what you can do in the studio. Another Demo Deal is when an individual investor (sometimes acting as a producer or co-producer) finances your initial recording. Under these deals, the label or investor fronts the money for you to go into the studio and record your demo. Their money is reimbursed, or "recouped," when that demo gets you a record deal. As an incentive to invest in the music, some demo deals offer the investor a small percentage of royalties from the songs on the demo tape when they are recorded and sold.
"Artists and Repertoire" (A&R) representatives from record labels sometimes approach bands and offer them demo deals. This generally occurs when a band generates interest from the A&R rep, but the label wants to hear the band in the studio before making an offer. The record label fronts the money to produce the demos, and then the label gets a specified period of time, such as thirty days, to make a decision on whether to sign the band. If the label wants to sign the band, contract negotiations begin. If the label passes on the group, the band can take the demo and shop it to other labels, but will probably have to reimburse the cost of producing the demo if that same demo gets the band a record deal somewhere else.
1. Definition of Terms.
(a) "Spec" deals are "speculation" deals. The concept of the deal is that somebody is providing a product or service for less than they would normally charge for it. In other words, they are investing time in the hopes of a return on their investment.
(b) Two types of spec deals are common in the music business: the producer spec deal and the studio spec deal.
(i) Producer Spec Deal. In a producer spec deal, the producer will produce one or more master recordings for a recording artist either for no fee or for a very low fee. The producer will then hope to (I) participate in the revenue from the sales of the masters he produced; and (II) if the artist gets a record deal, get the opportunity to producer one or more albums for the artist under their record deal for a customary fee and royalty.
(ii) Studio Spec Deal. The studio spec deal is similar to the producer spec deal. The studio will allow the artist to record one or more masters in the studio at little or no cost. The studio will then hope to (I) participate in the revenue from the sales of the masters produced in the studio; and (ii) if the artist gets a record deal, have one or more albums recorded in the studio at full or premium rates.
(c) It is important to note that, whether you are the producer, studio or the artist, all of the material points of the deal should be set forth in a written agreement. This prevents a dispute over either party's rights in the future. The cost of documenting the agreement in writing will be far less than the cost of resolving a legal dispute between the parties if there is no written agreement.
2. Producer Spec Deal
(a) Schedule/Number of Masters. The number of masters to be produced by the producer should be specified; the agreement should specify clearly the date for completion of the recording of the masters.
(b) Ownership/Control of Masters. In virtually all circumstances, the artist should own the copyright in the masters and should have the full right to use and exploit the masters as the artist chooses.
(c) Revenue Participation in the Produced Masters. The agreement should address the producer's right to receive revenue from the exploitation of the masters produced. The masters may be self-released by the artist or they may constitute all or part of the artist's album distributed by a third party record label. In either instance, the producer should receive a royalty from sales:
(i) Self-Releases. If the artist releases the album on his own label, through a third party distributor, or on consignment, the producer should participate in revenue and receive on average 15%-25% of the net revenue received by the artist (after the deduction of expenses).
(ii) Third Party Releases. If the record company pays the artist an advance or fee or acquisition of rights in the masters, the producer should receive or average 10%-25% of what the artist receives for the masters. The advance should be prorated if it covers masters produced by the producer and masters to be produced by others. The producer should also receive a royalty for sales of the masters, typically less than 5% of the suggested retail list price.
(d) New Record Deal. If a producer has produced demos for an artist, the demo producer may work on "spec" to receive points in the new deal. Some deals provide that the demo producer may have some participation in that new record deal. The key points for negotiation regarding the level of participation are set forth below:
(i) Timing Limitations. Generally, the producer only participates if the artist enters into a recording agreement within some reasonable amount of time after the production of the masters. The range is usually between one to five years, with the norm being in the range of two years.
(ii) Artist Obligations. If the artist enters into a recording agreement within the specified time period, the artist usually agrees to try to get the record company to approve the producer to produce at least the first (and sometimes the second) album under the new record deal. The artist cannot guarantee that the producer will get to produce, since the record company may refuse and the requirement to guarantee the production would kill the record deal. Consequently, most deals provide for a "buyout" if the producer does not get to produce (see below). If the producer is approved to produce, the spec deal usually provides that the artist and producer will enter into a producer agreement which will contain the following terms:
(I) Advance. The deal might specify the advance per master to be paid to the producer. The advance amount is negotiable.
(II) Royalty. The deal should specify the royalty to be paid to the producer for the masters to be produced under the new record deal.
(III) Credit. The deal may specify the credit to be accorded to the producer for the new masters. The deal should also specify the credit to be accorded to the producer in connection with the spec masters as well.
(IV) Additional Points. The additional points to be included in the new producer agreement may be left to good faith negotiations if and when the artist gets a record deal and the producer is approved by the record label.
(e) Buyout. If the record company does not approve the producer, the producer may receive a buyout payment and a royalty participation. The range of buyout possibilities is set forth below:
(i) Conditions for Buyout. The buyout should only apply if the producer is not given the opportunity to produce a minimum number of masters on the applicable album. Generally, if the producer produces at least half of the applicable album, the buyout should not apply.
(ii) Number of Albums. The participation is often for only the first album, but may extend up to two albums under the new record deal.
(iii) Advances. The producer may receive a percentage of the "net" advance received by the artist for the applicable album. Typically 10%-15%.
(iv) Override Royalty. The producer may receive a royalty participation on the applicable album generally in the range of 1% to 2% of the suggested retail list price.
2. Studio Spec Deals
Studio spec deals are very similar to producer spec deals ("PSD") except for a couple of important differences.
(a) Schedule/Number of Masters. Same as the PSD.
(b) Ownership/Control of Masters. Same as PSD.
(c) Revenue Participation in Studio Masters. The studio may receive a percentage of the artist's net revenue from sales of the masters until the studio recovers a previously agreed upon amount. Thereafter, the studio may continue to receive a reduced percentage until the studio receives a specified amount of profit on the initial budget or indefinitely.
(d) New Record Deal. The studio wants some involvement in one or more albums under a new deal. Typically the record company approves the studio for the recording of the album. If they do so, then the studio may receive its normal rental rates and fees. If the record company does not approve, the studio may receive an override royalty similar to the override royalty set forth in the PSD.
In these times when many more people are making records and a much smaller percentage of major label or top independent label deals are available, investor money is becoming more and more important. These days, it seems that half of the students in every junior high class have their own CD. They can download free software for multi-track recording with unlimited tracks and sit with their keyboard and a mic and crank out recordings and burn copies by the dozens or hundreds or take the files to a CD manufacturer and get a pallet of them. Even if no "true" national distribution is available, they can make their records available by getting a domain name and putting up a website (or set up a page on MySpace, Facebook and the like). But what's missing is how to distinguish one's recordings from the pack and truly create demand for the records and build the artist's profile and lay the foundation for bigger things in the music industry. Turns out, this often takes money (and a very good plan, carefully executed). Some common uses for money raised with an investor deal:
1. Recording fund: studio costs, producer fees, gear rental, travel and lodging of band members or producer or outside musicians, etc.
2. Artwork, album packaging design, manufacturing, website design and maintenance, etc.
3. Marketing: independent publicist, independent radio promotion, advertising (print and radio?), CD release party and/or concert expenses (especially if no cover charge), including travel, hotel, per diems, salaries for road crew and non-artist side persons in the band, etc. Multiple cities contemplated for marketing plan? In-house personnel for sales fulfillment, publicity & promotion. It all takes money.
B. Investor Agreement and/or Entity Formation.
Investors usually want maximum protection from personal liability and maximum tax benefits for the investment. As to protection from personal liability, this means they don't ant to be financially responsible for any over-budget costs or liability for person injuries gear damages that occur in the studio or liability for personal injuries from an automobile accident while your are doing promotional touring for the CD, etc. This often means forming an entity such as a limited liability company or corporation or limited partnership. Entity formation was discussed in the prior panel.
With certain kinds of investors (like perhaps your uncle & aunt) and certain kinds of projects, your investors may (or may not) be okay with just an investor agreement, one that clearly sets forth their role as passive investors. In this panel, we will consider the "deal points" of such an investor agreement. Such terms could be incorporated into a stand-alone agreement where the there is no entity (such as a corporation or LLC) formed or where the investor is not part of such an entity or where some/all of the terms could be incorporated into an entity's operating agreement (or attached to it), depending on whether the investors are to be members/shareholders of such an entity.
C. Investment Agreement Terms.
1. AMOUNT(S) AND TIME(S): one-time lump sum; multiple payments; initial payment(s) with obligation for additional amounts to be determined by circumstances; penalties if fail to invest subsequent amounts.
2. USES OF FUNDS. " for any purpose reasonably related to the record album project, including but not limited to, the following development, pre-production, production, post-production, manufacturing, marketing, and promotion expenses: producer fees and expenses, rehearsal space rental, rehearsal pay for musicians, studio rental, equipment rental, engineer fees, tape costs, musician recording fees, travel costs, hotel, ground transportation, studio food and beverage, mastering, artwork, cover/packaging design, manufacturing, color separations, printing, shipping, postage, long distance, faxes, advertising, publicist, radio promotion, internet web site promotion, release activities such as showcase performance expenses, etc "
3. NET PROFITS:
a. Definition of "Net Profits" (Gross Revenues less all Expenses)
b. Definition of "Gross Revenues" (" all revenues received hereunder, including, without limitation, sales from Artist's live performances, sales to retailers, and distributors, and royalties, advances, flat fees and other revenue received from licensing and/or sales of any or all masters produced hereunder to third parties...")
c. Definition of "Expenses" (" all amounts expended or incurred hereunder as permitted Uses of Funds as defined above ")
4. CALCULATION AND PAYMENT OF EXPENSES, INVESTMENT REIMBURSEMENT AND PROFITS:
(a) Priority of allocation of Revenues received:
(i) Payment of Expenses to 3rd Parties (studios, producers, publicists, etc.)
(ii) Investors (disbursements to be in the proportion of each investor's investment, such proportion represented by a fraction, the numerator of which is the amount invested by the investor and the denominator of which is the total dollar and in-kind amount invested in the Album project by all investors)
(iii) Net Profits: disbursed in the proportions set out in 4(c) below.
(b) Collective Investor Share of Net Profits Disbursements: 100% until investment recouped and thereafter 50%? Or, 50% from the beginning? Other? This is all negotiable and depends on factors such as the size of the investment, how comfortable the investor is with when he/she receives a return (if ever), the cash flow needs of the business (artist, label, et al.) who is receiving the investment (e.g., an artist may need to retain a portion of live CD sales in order to survive on the road in the early days of a career and this ultimately can help the project -- and therefore the investor - reach a profitable stage).
(c) Individual Investor's Share of Net Profits Disbursements: the total Net Profits distribution multiplied by a fraction, where the numerator is the amount of the Investor's investment and the denominator is the sum of all investments by all parties (whether monetary and/or in-kind?)
(d) Cap on Total Return? 20%? 200%? (i.e., if Investor invests $5,000, her/his maximum return on investment shall be the initial $5,000 plus up to $5,000 in net profits). Again, this is subject to negotiation and depends on total amount invested, how interested the investor is with getting a return on her/his money, etc. You may decide that the investor is on board for the entire life of the album. Or you may cap it in terms of total return and/or a time period and/or the return after recoupment of investment may phase out over a fixed period, post-recoupment ("sunset").
(e) Changes in Investor's Share as the Project Develops: A project may run over-budget or opportunities may present themselves that require additional investments that dilute the original investment share. Provisions need to be put into place that govern whether and how this will be permitted.
(f) Salary or Stipend for the Manager of the Project (for the self-releasing artist or label president or whoever's project this is)? Will you be entitled to some sort of salary or stipends or advances that will be considered part of the projects Expenses or are these advances against your share of Net Profits?
(g) Re-purchase of Investor's Shares. Will you have the right to buy out investors and under what terms? (e.g., at 120% of the Investor's investment, over and above any amount the Investor may have received up to such election by you, not to exceed 200% of Investor's total investment?)
5. OWNERSHIP: Clarify that the investor will own only the right to receive the share of Net Profits but will own no rights in the master recordings.
6. ACCOUNTING: There should be regular accounting statements (semi-annual or annual?), along with any payments due.
7. DISCLOSURE OF RISKS: "When investments are made by individuals or companies that do not manage the enterprise they are investing in, their interests are called securities. Security interests include the interests of 'silent partners,' limited partners, passive investors or stockholders. These individuals all share a common characteristic: they are putting money into an endeavor or business but they are not running it. State and federal security laws are designed to protect these investors by ensuring that the people managing the business (e.g., you the Artist/Small-Label-Owner or the general partners of a Limited Partnership or the managers of an LLC or the officers of a small corporation) do not defraud investors by giving them false or misleading information about the business or by failing to disclose information that a reasonably prudent investor would want to know before making an investment.
Public offerings of interests (investments) in a project or business are (again) considered securities and such offerings are subject to state and federal laws. These laws are complex and strict and one should not attempt to navigate them without a lawyer. Ordinarily, the law requires securities to be registered with state and/or federal governments. But registration is to time-consuming and expensive from most low-budget, independent music projects such as an album. Independent music business folks can avoid the cost and expense of securities registration only if they qualifier for one or more exemptions, including: sales of interests limited to 35 persons; purchasers need to have a "pre-existing relationship" with the issuer or the purchaser needs to be sophisticated in investment transactions; the purchasers cannot purchase for re-sale; no advertising or general solicitation is permitted.
This said, serious disclosure language is often put into investor agreements, such as what is noted into the footnote below.¹
¹You have been informed and understand the following: (a) the music business and recording industry are highly speculative and risky businesses; (b) many album projects which are begun are not completed for reasons beyond the control of the production company or artist, such as the inability to raise sufficient funds within a reasonable time frame to complete the project in the works (c) many albums which are produced are never picked up by record labels or distribution companies; (d) many albums which are picked up by labels are never released and/or meaningfully distributed; (e) many albums that are distributed or which are picked-up and released for distribution by labels do not earn enough revenue to recoup expenses and generate profits for the production company. You are further informed and understand that there is no standard or uniform definition in the music business or recording industry for "net profits" or "production company's share of net profits" or the like, so that while Awesome Records intends to be diligent in the business of selling records directly and/or diligent in negotiating as favorable terms as possible with third parties such as record labels or distributors, there are no guarantees concerning the terms that will be obtained, or that the terms will yield actual net profits, since the terms obtained may depend on the relative bargaining power of Awesome Records and Artist and other factors beyond Awesome Records' immediate control. THE INVESTMENT PERCENTAGE OFFERED HEREBY HAS NEITHER BEEN REGISTERED WITH NOR APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR THE STATE SECURITIES AUTHORITIES OF ANY STATE NOR HAS ANY COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS AGREEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
8. SUSPENSION OR ABANDONMENT OF PROJECT. If development of the proposed album project is abandoned for any reason, or if production is not commenced, what are the obligations (if any) to the investors beyond returning their money?
9. DISCLAIMING ANY AGENCY OR PARTNERSHIP-TYPE RELATIONSHIP.
10. MISCELLANEOUS. The usual laundry list of boiler plate protections common to most agreements in the music industry (and many in all industries): no oral modification; notice; right-to-cure; warranties; indemnities; attorney fees; choice of law; forum/venue restrictions; etc.
Technological advancements in the internet age have caused a decrease in physical album sales. As a response, 360 deals have become the norm with major record labels. The 360 deal involves a contract between the artist and, typically, the record company (Madonna and Jay-Z agreed to 360 deals with event promoter, Live Nation). This agreement allows the record company (or other music company) to share in many of the artist’s non-recording sources of income (t-shirts, posters, touring earnings, sponsorships, books, commercials, toys, film/TV projects, etc.). In return, the record company agrees to provide support for the artist through larger direct advances, opportunities to cross market products, and funds for marketing, promotion, and touring.
The 360 deal was designed to be a win-win for both the artist and record label. The artist gets more money upfront, but more importantly, is given time to develop and establish themselves as fixtures in the music world. In turn, record labels recover money (and then some) lost from decreased album sales, and have more of a vested interest in helping their artists achieve success. The upfront financial support from the record label can provide for a far less stressful relationship between the artist and label. Traditionally, artists were pressured into releasing albums because of contract stipulations. The 360 deal allows the artist to take their time writing new material because the label is generating income from multiple revenue streams, not just album sales. Under a 360 deal, labels are incentivized to create a mutually beneficial relationship with their artists through assisting in all aspects of their career because the more money the artist makes, the more money the label will make.
There is a lot of controversy surrounding 360 deals, but if you want to sign with a major label (and some indies as well), 360 deals are the current business model. Many critics see 360 deals as a money-grab for the record labels. Whether or not a 360 deal is right for you will be dependent upon the size of the advances, non-recoupable payments, and the revenue split between the artist and the company on record sales, merchandising, touring, and other non-recording sources of income. If you are signing a 360 deal, be clear on the revenue streams and percentages of each being shared by you and the label. You will also want to know exactly what services the label will be providing in return for your shared revenue. You will not only be sharing revenue in merchandising, live performances, and licensing deals, but ultimately the present and future value of your “brand” as an artist.
Not necessarily. Demo deals generally include provisions that give the record company "first negotiation rights" and the right of "first refusal." In effect, if you accept funds from a label to record your demo, you are obligated to negotiate with that label for a deal before you go anywhere else to shop the tape. If you are unable to reach an acceptable agreement and you receive a better offer from another company, you have to give the original label its right of first refusal, which is a chance to either match the offer or let you go.
If the original label is willing to match the better offer, you will be obligated to sign with it. If not, you can sign with the new label, but you will be responsible for reimbursing the cost of the demo. Usually the signing label reimburses the label that funded your demo recording as a part of your signing deal. They will, however, want to recoup the cost from your royalties, so ultimately you may end up paying for the demo.
The word "record" is a "term of art" in the record business, which is a word that has a special meaning within a particular business that is different from the common meaning. In a recording contract, the word "record" includes any audio recording device; such as CDs and vinyl records, and any audiovisual devices, such as DVDs. In fact, anything that is capable of transmitting sound is included in the definition of a "record" in your contract, so all new technologies will come under the description.
Contract options are rights that you grant to the record company to buy your records and produce them within a specified period of time. Options are only irrevocable from the artist's side of the deal, meaning that you cannot take the options back, but the record company is not obligated to exercise them. Essentially, the options allow the record company to hold the artist to the terms of the contract for as many albums as the company elects to take. With a new artist, a label may commit to accept the first album (the "commitment album"), and then hold the artist to six to eight "option periods." The company must exercise each option within the option period (usually nine months), or the option will expire and the contract ends. If you are successful, the company will continue to exercise its option to produce your next record. If the company is unsatisfied, it will decline to exercise the next option and let the contract expire.
The length, or "term," of the contract is not measured by years in the recording industry. Instead, the term is measured by album production periods so that the contract remains in force until the artist delivers the last required record. Most contracts provide for an initial period of one or two records, a number of option periods, and then a period of six to nine months after the final album is delivered. For example, the initial period of a typical contract begins when the deal is signed and ends when you deliver the first recording. If that deal includes six option periods, you could potentially be under contract for as long as it takes you to produce seven albums, plus nine months. Or, if the company does not pick up its option to produce your next recording, you could be out of the deal nine months after you deliver the first record.
This doesn't mean you can be under contract forever if the company picks up its option and you never produce the record. Recording contracts routinely include "late delivery" provisions, which stipulate that if the artist fails to deliver the next recording within a specified time, such as nine to eighteen months, the company can cancel the deal. The company also will not accept all seven albums at once. The contract will usually provide that the artist must deliver the next commitment album no sooner than six to nine months and no later than nine to eighteen months after the last album was delivered.
If you want to try out the business before you dive into a potentially long-term contract, independent labels are more likely to contract for just one record (a "one-off" deal).
The "amount of product" you are committing to produce for the company is the initial commitment album(s) plus the total number of albums called for in the option periods of the contract. If the label offers you an initial commitment of one record with six option periods for one record each, you are committing to produce up to seven albums for the company. You do not necessarily have a deal for seven albums. You have a solid deal for one record, and then the company gets to decide if it wants to exercise its option on the second record, the third and so on.
"Advances" are sums of money that record companies give to their recording acts in the beginning of a contractual relationship to get the group started in recording and supporting an upcoming record. The advanced money is "recouped," or taken back by the company, out of your artist's royalties for the number of records you sell. Advances are generally structured as a "recording fund." This fund will be a set amount of money allocated to the artist to cut the record and any cash surplus goes to the artist as an advance on his royalties. The entire fund is "recoupable" against the artist's royalties. For example, if the company provides your group with a $50,000 fund, that money is yours to produce the record and you may keep whatever is left over as an advance. The company will then withhold $50,000 from any royalties due to your group from the sales of your record.
Advances are non-returnable, so you don't have to give the money back if you don't sell any records. However, the record companies don't allow you to pocket this money if you remain under contract and produce another record for the label. The company can still recoup the $50,000 advance by piling it on top of the recoupable advance for your next record. This practice is called the "cross-collateralization" of your albums, and it will be specified in your recording contract. The amount you still owe on your advance for the first record "piggy-backs" on to the next record so that you do not receive artist's royalties for either record until the company recoups all of the advance money it has put up so far. Continuing the example above, if you take a $60,000 advance for your second record and it earns you artist's royalties of $100,000, you do not get to pocket the $40,000 difference. That surplus will go back to the record company toward the $50,000 of recoupable advance from your first record, and you will still be $10,000 in the recoupable hole!
These numbers may sound intimidating when they add up, but think of it in terms of risk. You need the advance money to cut a great record, buy some beautiful new guitars and quit your day jobs so that you can put all your energy into promoting the record. The record company makes a high-risk investment in your group knowing that if your records don't sell, it will never see the money again. The company protects its risky investment by cross-collateralizing it against your subsequent albums that will hopefully sell better as your career matures. Your group gets to make a record and buy those beautiful guitars, but the money is more like a loan against your future earnings than a gift, and you may still be paying it back several records into your contract. Also note that advances are taxable income, so be sure to report them on the band's business tax forms and/or your personal income tax return.
Artist's royalties are computed as a percentage of the "suggested retail list price" for the total number of records sold. A new artist can contract to receive anywhere from an 8% to 15% royalty rate, depending on the level of hype surrounding his signing and the business practices of the particular record label. The royalty percentage is commonly expressed in "points." If you get a 12% rate, then you've got "12 points" in your deal. Royalty rates may also be expressed in "escalations" for selling a certain number of records, such as 10% for sales up to 100,000 units sold, 12% on 100,000 to 500,000 units sold, and 14% for all records sold beyond the 500,000 mark.
Some standard industry deductions apply to the royalty rates so that the artist does not actually receive the full royalty percentage of the retail price on each record that he sells. The largest deduction is for the packaging and label on the record. Because a part of the purchase price reflects the cost of the packaging, the companies do not pay royalties on that amount. The packaging deduction could amount to a quarter of the suggested price, so if your record is listed at $12.98 per CD, the price would be adjusted to $9.73 per CD ($12.98 minus 25% for packaging) before your artist's royalty is applied. If your royalty rate is 12%, the packaging deduction would bring the royalty down from $1.56 ($12.98 x 12%) to $1.16 ($9.73 x 12%) per record. Also, if your deal is the "all-in" type, you are responsible for paying the producer's royalties out of your cut. For instance, if the producer gets a 3% royalty, that will bring your royalty down again from 12% to 9% of the retail price after the packaging deduction adjustment, or 88¢ per CD ($9.73 x 9%).
Other common royalty deductions are deductions for "free goods" and promotional records. Some record companies designate a percentage of the records they distribute to wholesalers as "free goods." Since artist's royalties are only paid on records sold, by definition "free goods" earn no royalties. Likewise, when the company sends out promotional copies of your record to radio stations, retailers, promoters and so forth, they do not pay you a royalty on these copies because they were not actually sold. Your royalty account is also likely to be charged for promotional costs, travel and accommodations, video production costs and tour support before you get to pocket your royalties.
Another important aspect of the royalty clause in your recording contract is a provision that allows a "reserve" of royalty monies to be held by the company until all sales are final. This is because records are sold on a refundable basis to the wholesalers and retailers. If the records don't sell, the record stores send them back and the artist does not receive a royalty on the returned records. The "reserve" amount is usually expressed as a percentage of the total royalties owed to the artist. If your contract specifies a reserve of 30%, that means that the company only pays you 70% of the artist's royalties due you after all your advance money is recouped. The company holds the other 30% to make sure the records are all sold, rather than shipped back from the record stores six months later because of poor sales. When all sales are final, the reserved 30% of the royalties should be released to the artist's royalty account.
The "controlled composition" clause in your contract refers to the mechanical publishing income that you earn from the record company aside from your artists' royalties on records sold. When your publisher grants a mechanical license to the record company to reproduce your songs, the publisher is entitled to collect the mechanical royalties for every composition on the record that is owned, written or otherwise controlled by the artist. The record companies prefer to reduce the amount they have to pay out to your publisher in mechanical royalties because the companies don't get to recoup their expenses against your publishing income as they do against your artist's royalties.
In effect, the company may owe you mechanical publishing royalties although you still owe the company a chunk of your future artist's royalties for advances and recording costs. Record companies tip the scales back into their own favor by stipulating in your contract that they will only pay you a percentage of the statutory mechanical licensing rate for your mechanical royalties. Even though the minimum rate of 7.1¢ per copy is designated by statute, the law allows you and the record company to set your own price in the contract. The industry standard is 75% of the statutory rate of 8.00¢ for songs five minutes or less or 1.55¢ per minute or fraction thereof per unit sold - whichever is greater, in mechanical royalties. The per-album rate is usually capped at 10 times the per-song rate, regardless of how many songs are on the record. The company may also stipulate that they don't have to pay you any mechanical royalties on the "free goods" and promotional copies discussed in How are the royalties computed?
For any songs recorded on the record that were not written or controlled by you, make sure that your contract provides the full statutory mechanical license fee, instead of the 75% fee for your songs. If your contract also imposes the limit on songs not controlled by you, you may get stuck either bargaining with the copyright owner of the cover song or paying the other 25% of his licensing fees out of your own mechanical royalties.
All in all, you stand to lose some significant publishing income in the nuances of your contract's "controlled composition clause", and you may be counting on this publishing money if your artist's royalties are not coming through when you need them. Controlled composition clauses are complicated, but take the time to discuss the terms with your attorney because this clause determines a big part of your early cash flow. Your attorney can try to negotiate the terms of the controlled composition clause for you, but keep in mind that this setup is the industry standard, and your bargaining power is slim in the beginning. Ask your attorney to try and get you larger percentages than 75% on subsequent albums, and to negotiate a higher per-album limit than 10 times the per-song rate if the album will have many more songs on it. Also, ask your attorney to make sure that you get the full statutory license fee for cover songs that are not controlled by you.
Probably, yes. Recording contracts for new and mid-career artists routinely include a "pay or play" provision that allows the company to pay the artist off rather than produce the records. The company may exercise this right to pay you off if the company does not think the record will be profitable or if the company is in operational limbo for any reason. The payoff is either the minimum union scale for an album or the difference between the recording fund the company would have paid and the projected recording costs.
The "grant of rights" clause in your contract itemizes the rights that you agree to give to the company as part of the deal. This clause will typically state that:
Any masters and copyrights from any sound recordings produced during the term of the agreement are the sole property of the record company;
The company has the exclusive right to reproduce and distribute the recordings throughout the entire world and universe;
The company is the sole owner of any album artwork created for the contract recordings;
The artist is exclusively engaged by the recording company and will not record for any other company or individual during the term of the contract;
The artist grants the company the right to use and publish his name, likeness and biographical material for promotional materials and activities.
The company can refuse to accept the record in several scenarios. Every recording contract includes a "Warranties and Representations" clause. This is a list of guarantees that you make to the company as part of the agreement. If you breach these guarantees, the company can refuse to accept the record and you may be subject to the withholding of your royalties, a lawsuit, or the cancellation of your contract. Warranty clauses vary, but every one will require you to guarantee that none of the songs or artwork delivered to the company contains material that infringes any trademarks or copyrights, or will otherwise cause the company any legal troubles. If you deliver a master that contains an unlicensed sample, then the "warranties and representations" clause of your contract kicks in and the company can refuse the entire recording.
The contract will also stipulate specific "delivery requirements". If you hand over your master recordings and the company decides that these requirements are not met, it will refuse to accept the recordings. The typical requirement is that the masters must be "technically and commercially satisfactory". A recording is "technically satisfactory" as long as it sounds like a professionally produced piece of work, as opposed to something you recorded on a 4-track in your bedroom.
"Commercially satisfactory" is a much tougher standard. It means that the company thinks the record has potential for commercial success. If the company decides that the record probably won't sell, it can refuse to accept delivery and possibly cancel the contract. The company may also specify that it does not have to accept "limited market recordings", such as children's records or a Christmas album, and that you may not deliver any songs you recorded before entering into the contract.
"Tour support" is money that the record company advances to the band to cover any losses incurred on tour. Tours often end up costing more than they earn for newer artists, but because touring is necessary to promote your records and gain exposure in new markets, the record company may front some money to the band to keep it on the road. Recording contracts generally provide that tour support money is recoupable against your royalties, so ultimately the band will pay the entire cost of the tour.
Guest performances on other artists' recordings are called "sideman performances." Recording contracts require artists to record exclusively for their own labels, but the record companies allow sideman performances because the companies also benefit from guest appearances on their own artists' recordings. You can usually appear on a friend's record without dispute so long as you are not featured on the record. Your friend's label obtains a simple clearance from your record label and includes a "courtesy credit" on the album covers to acknowledge your label, such as "Jane Doe appears courtesy of XXXX Records." If you are in a group, multiple members may not be able to appear together on another artists' record because your unique group "sound" is exclusively contracted to your own label.