Transactions in the film industry can range from the simple (a two-person partnership or distribution agreement) to the complex (international co-productions). No matter how complex (or how simple) a transaction may be, it can always be understood better if it is broken down into three basic elements: Money in, money out, and control. Even if a transaction seems simple, it is always worth asking the details of these three elements to make sure everyone is on the same page.
Money inflow: Here are the questions you should ask yourself about cash inflowing:
Who contributes money?
What triggers the contribution?
When do they provide information? Is everything done in advance, over time or in stages?
How are they required to contribute?
What happens if they don’t contribute?
And most importantly, and all too overlooked, what happens when (not if) more money is needed?
Cash outflows: When they think about money outflows, other people move on to allocating residual earnings (e. g. , “It’s 70-30”), but there’s still a long way to go before they get there:
Do you earn fees for services, such as monitoring fees or manufacturer fees?
Do you get a distribution to cover your taxes on the source of income from the transaction, such as taxes on the “phantom source of income” of an LLC?
Is the user investing cash to earn interest or get their cash back?If so, how much and when are you paid?
Is whoever put money in getting their money back first before profits are split? If so, are they getting it repaid out of 100% of all cash or only upon a capital event, such as a sale, liquidation, or refinancing?
Should dividends be paid, adding ticket sales bonuses, praise bonuses, gross dividends and net dividends? Who should pay them and what happens if they don’t have the cash to pay them on time, like a manufacturer promising to pay a box office? premiums that a distributor couldn’t possibly pay?
And finally, how are the residuals distributed?
Control: And finally, the ultimate vital question: who is in?There are other paradigms:
Does one party have complete control, and the other parties have no veto rights?
Does one party have general control, but the other parties have veto rights over important matters, such as transactions with affiliates and dilution?
Is this true joint control, so a unanimous vote is needed to do something and only one user can cause a crash? If so, is there a tie-breaking mechanism? (For what it’s worth, I would have the parties work it out between themselves when there is joint control. )
Does one party have something artistic and the other monetary? If so, what if artistic decisions have a monetary impact?
Can one party’s approval or approval rights be transferred to third parties, and if so, do other parties have first negotiation, last refusal, or follow-on rights? Can one party force a sale on everyone?
By asking these simple questions, you can have a basic understanding of any transaction, and it is far better in any event to ask the questions in advance rather than asking them later in litigation.
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