F-Up #27 “People Don’t Work on Credit”
New filmmakers often don’t realize that one of the greatest tools of negotiation may not be what you agree to pay now, but what you agree to pay later.
How to Do It Right…
In the world of filmmaking, there are two popular types of IOUs used to help reduce upfront payment by offering money that may be paid later—if the conditions are right.
“Deferring” a cost simply means agreeing to pay it later, should you be able to. Unlike traditional “debt,” deferments do not involve collateral and thus lack a guarantee that they ever get paid.
The rules of how you can offer deferments are not carved in stone; your offer simply depends on the situation and your negotiating abilities. You can negotiate part or, in some cases, entire salaries or costs into deferments. You can attempt to defer payments until your next investor’s check shows up or until your tax credit comes in. Some pay can even be deferred until the movie actually starts selling. This arrangement can be useful for attracting actors, crew, and so on when you do not have enough money to pay them as much as they would like. Some actors may take a deferment for all or (more likely) part of their pay. You can offer X dollars in upfront pay, with a deferment of Y more dollars hopefully to be paid later.
This payment approach may sound wonderful and many independent producers can quickly get deferment happy, but there are a few crucial things to keep in mind before getting carried away on the deferment train. First and foremost, you still owe the money. At whatever point income starts flowing in, individuals with deferments have a legal right to claim their cash. Depending on how the contracts read, they may be first in line before you, your investors, even your distributors.
Some distributors will not take on a film if it has too many deferments because it will hinder their ability to collect income from it. Furthermore, asking for too many deferments may make you look untrustworthy to your cast and crew, and can risk insulting the people working on your film. Whether you’re hiring an actor, technician, crew person, or anyone who provides a good or service that plays a part in the filmmaking process, you should always respect that as someone’s job and livelihood. Asking someone to do what she does for a living purely on good faith may leave that person in a difficult financial position. Thus, the assumption that she should do it forfree with the hope of pay later may not go over very well.
Deferments can make a project less appealing to investors because most deferments will have to be paid before they start getting back any of their money. It can be difficult to explain to investors why money is coming in but not going into their wallets. With this notion in mind, there is another type of incentive you can offer that will not come out of the investors’ pockets: points.
Points are a percentage of a film’s profits. Thus, there must be profits for the points to be worth anything. Points will not be paid out until all your deferments have been paid and your investors have been completely paid back, generally with a 10 to 25 percent bonus on top After that, profits are generally split 50 percent to the investors (called “the investors’ share”) and 50 percent to the producers (the producers’ share).
Points are taken solely as a percent of the producer’s share so that the investors’ portion of the profits is protected. Thus investors may prefer you give out more points than deferments since it doesn’t cut into their piece of the pie. Points, like deferments, can be offered in lieu of upfront payment. But what can make points more appealing than deferments (even though they get paid later) is that they work on a percentage. A deferred payment of $100 will only ever be worth $100 (plus any interest offered). However, because points are based on a percentage of a film’s profit, they are limited only by how much money the movie makes. Some actors will even work for “minimum” salaries (the lowest amount of money the union will allow them to be paid) and take all their money in points because they are that optimistic that a film is going to be wildly profitable. Tom Cruise took this exact approach with the Mission Impossible movies, in which he received a minimum salary while working on the movies in exchange for huge points later.
When a person takes points in lieu of at least partial salary, it is a sign of faith in the movie and its chances of being profitable. It also provides that person a very real financial incentive to want to see the film succeed. Some indie producers give their entire crew some small number of points (even if it’s a fraction of one point) so they are incentivized to work hard to make the movie a success. If an actor, crew member, or vendor is willing to take a deferred payment or points in lieu of upfront payment, this can greatly aid you in reducing upfront costs. Just be aware of the amount of deferments and points you are racking up, what paying them back will mean, and what percent of the producers’ profits you’ve given away. After all, should the movie be a hit, you want to give yourself a chance to reap the financial rewards as well.
Excerpted from First-Time Filmmaker F*&^ Ups by Daryl Bob Goldberg ©2011 Elsevier Inc. All Rights Reserved.