Survey passman chap_8_fa13

1. A D V A N C E S A N D R E C O U P M E N T
Chapter 8

2. Advances
 Advance: money paid to artist out of future royalties
 Ex - the record company pays the artist a negotiated
sum of money to sign a record deal.
 Let’s say $100,000.00 – hey, think Big!
 This money is said to be an advance because it
comes from future royalties.
 Record company then keeps the first $100,000.00 of
the artist’s royalties in order to pay itself back.
 This is called recouping the advance.

3. Recoupment
 Recoupment is the process of keeping royalty money
otherwise payable to the artist in order to cover the
costs of advances and other expenses.
 Monies are said to be recoupable if they are deducted
from royalties.
 Advances and expenses that are not yet paid back are
referred to as unrecouped.
 If the artist has unrecouped expenses, they are “in
the red:” in a deficit situation – name comes from
accounting use of red ink for a business loss.
 Once artists recoups, they are “in the black.”

4. Recoupment: other recoupable expenses
 Advances aren’t the only monies that are recoupable.
 Recording costs: includes more than you think
 Studio time, equipment rental, travel, cartage (instrument and
equipment transportation), musicians at union scale, food
while recording (!), producer’s per diems and rentals (!)
 Video costs
 Usually 50% of the costs are recoupable
 Independent promotion costs
 Tour support
 “Any amounts paid to you or paid on your behalf or
otherwise paid in connection with this agreement.”

5. Nonrecoupable Expenses
 Not industry custom to recoup some costs paid in
connection with the artist’s agreement
 Manufacturing costs, advertising, marketing,
shipping, etc. are not typically recouped.
 Contracts should include language that excludes
amounts that are “customarily nonrecoupable in the
industry.”

6. Risk of Loss
 Advances are non-returnable
 Means that advances are totally at the record
companies risk
 If artist doesn’t sell enough to recoup, the label does
not recover their advances.
 For the artist, this means that advances are taxable
when you get them, not when they’re recouped.
 Artist doesn’t receive any royalties if they don’t sell
enough to cover their advances.

7. Cross-Collateralization
 Cross-collateralization refers to the pooling of
royalties earned for different albums recorded under
the same record contract for the purpose of
recouping expenses.
 Example:
 Artist gets $100,000 advance for album one, plus
another $100,000 advance for album two.
 Album one earns $10,000 in royalties while album
two earns $120,000
 Does artist get paid royalties on album one or two?

8. Cross-Collateralization
 Answer: NO!
 Album one is $90,000 unrecouped or “in the red.”
 Album two is $20,000 “in the black.”
 However, the two albums are cross-collateralized;
meaning the entire $200,000 deficit (100,000 for
each album) is recouped from the entire $130,000 in
earnings ($10,000 from album one and $120,000
from album two).
 Meaning artist is still $70,000 in the red and the
deficit carries forward to any future albums.

9. Cross-Collateralization of Deals
 Means that the cross-collateralization is between
separate agreements.
 Means that advances made under one agreement can
be recouped from the royalties of both
 Never a good situation for the artist.
 Ex – an artist signing a recording deal and a
publishing deal with the same company. Artist has
radio hit with song they wrote, but doesn’t sell
enough records to recoup their record advance.
Advances from label would be recouped from
publishing royalties.

10. Cross-Collateralization of Deals
 Another example is a sequential deal.
 Cross-collateralizing sequentially means that
advances under the current deal are recoupable from
royalties earned under past or future deals.
 Look for language in the contract like “royalties can
be used to recoup advances paid under this or any
other agreement.”

11. Advances and Recoupment
 Questions?