Production "Demo Deal" Agreements

by Robert H. Reynolds

I put my pants on just like the rest of you – one leg at a time. Except once my
pants are on, I make gold records.
– Producer/Rock Legend, Bruce Dickinson

Unfortunately for Producers (albeit, fortunately for their lawyers), without well-drafted contracts, making gold records does not equate to making any more money than with demo records heard only by the band’s immediate family. The reason for this anomaly is that, unlike the standard hourly fee plus studio time, a production “demo deal” agreement gives a producer the contractual right to an artist’s future income.

Q: Why would musicians sign an agreement giving up future royalties? A: Why do accident victims hire lawyers on a contingency basis?
Musicians usually have neither the money nor the capacity to produce high quality demo recordings, and excellent recordings are needed to get a record deal. Producers have the resources and skills to make demo recordings, which (like trying a personal injury lawsuit) can be prohibitively expensive. Production deals bridge this gap by allowing a producer to take a speculative, ownership interest in the future use of an artist’s recordings. Thus, the artist gets his demo and the producer eventually (hopefully) gets paid.

Despite this financial rationale, artists with enough capital to pay for their own recording are not always better off than those who work on “spec.” The shared ownership structure of a production agreement adds another party to the team with a financial interest in the band’s success. If the producer has industry connections, he/she will likely use these connections to help the artist secure a record deal. With Las Vegas band The Killers, for example, the name of their spec mixer, Mark Needham (Cake, Chris Isaac, Fleetwood Mac), leveraged the band’s ability to generate record label interest.

At least with respect to getting “producer points,” producers range from a low-level engineer who is willing to work on “spec” to a near-celebrity who co-writes hit songs but can’t even turn the dials. When representing a band for a production deal, the more and better quality services and connections your client receives, the more financial incentive a producer can command.

Demo Deals v. Producer Agreements for Signed Artists

Producer “demo deals” should not be confused with Producer Agreements executed after a record deal is secured. After an artist is signed to a record deal, it is usually the record company which pays all the recording costs and, of course, the record company owns the recordings. The automatic assumption might, therefore, be that the producer will enter into a contract with the record company. This is incorrect, however, as American record companies invariably refuse to enter into any contract with a producer but instead insist that the artist or the artist’s production company enters into the agreement. In this way, the record company shrugs off any responsibility for the producer and side-steps potential contractual difficulties. They also usually persuade the artist’s lawyer to deal with the paperwork.

Two Types of Production/Demo-Deal Agreements:

There are two basic types of production agreements signed before an artist has secured a record deal. Because the producer is usually making three to five recordings as opposed to a twelve-track album, these are commonly referred to as “demo deals”:

1. Exclusive, net profits-based “Production Company” agreements; and
2. Nonexclusive (supposedly; in practicality it depends on the cost to the artist) royalty-based “Producer” deals.

I will discuss each separately.

1. Exclusive, Profit Share, “Production Company” Deals

This first type of demo/production deals usually entail more than just making a good recording, in part because they involve ownership of approximately one-half of an artist’s royalty income (including advances). These deals are most common in the country, pop and urban music genres. In fairness, getting a record deal in these genres seems to be more difficult than getting a deal for a rock band. Making “buzz” in these genres also frequently requires more start-up capital. It is not uncommon for a production company to expend significant money on living advances to the artist, marketing, and promotion.

A producer’s ownership interest ranges between 40-60% of the artist’s net receipts, which can increase over subsequent albums and have escalations at sales plateaus. One of the more hotly contested items is the definition of “net receipts.” This is the money that is left over after the production company has recovered its costs, and from which the artist will be paid. Some artists will fight to establish exactly what expenses the production company can claim, and they may want some form of control over the amount of money a production company can spend on an artist’s behalf. For example, when a production company takes an industry executive out for golf and drinks, who ends up paying? (Remember, a vague contract may be interpreted against the drafter.)

These exclusive, net-based deals also may include publishing, merchandise and tour income. Production Company deals can be for any number of albums (usually 1-5) or can be set to match the number of records under an artist’s future recording agreement. Usually the Term is structured as an Initial Term with a set number of Options to renew, such Options at the Production Company’s sole discretion.

These deals are exclusive, in that they prohibit the artist from entering into such an agreement with another party. In other words, an artist couldn’t make another demo with a third party and use that to get a record deal. So the quality needs to be good, or the artist can suffer. [Note: While this article is framed from the Producer’s perspective and is useful when representing music producers, from an Artist’s point of view, these agreements can be some of the most vital in their career. A bad production deal can be worse than a bad management deal and may even prohibit an artist from ever getting signed or having a successful career.]

Other important provisions in Production Company deals include (i) creative control, (ii) a release commitment, and (iii) a buyout clause. Creative control provisions are self explanatory.

Release commitment provisions can become one of the most disputed points of negotiation. In short, a release commitment is a positive obligation on the part of the production company, either to release the recordings themselves or to secure the artist a deal with a record company to release them within a certain period of time. There are many creative ways to structure the deal so that the Producer is virtually guaranteed payment if the Artist ever gets a record deal. There may also be a provision that if a major record deal isn’t obtained within a time as short as one year, then the Artist owns the Masters outright and without cost to the Producer. Artists with good legal representation and leverage may request the right to approve the record deal so that the production company can’t simply pass the artist off to a tiny label with poor terms only to get a cut before the Term ends. They may also request that if the contract ends without a release, they either own the recordings, have the right to buy the recordings back, or can force the production company to license them to a record company for release elsewhere.

Like a release commitment, a buyout clause allows an artist to be released from their contract for a predetermined fee. Producers should avoid this clause as they will have more leverage to get the right price from the Artist when the Artist later “wants out”. This is particularly the case if an Artist is trying to capitalize on a cheap buyout before signing to a major label.

The exclusivity provision in these agreements also results in the production company, as opposed to the artist, signing directly with the record label. So (as the Production Company lawyer) you will likely be the lawyer negotiating the record deal. At that time, you need to be sure that the artist is contracted directly to the record company for recordings that they will deliver after the term of the production deal. This peculiarity also makes an artist’s dealings with a record company somewhat different than if signed directly. For example, an artist signing to a record company would have the right to inspect their accounts if they suspect they have been under-paid. With an exclusive production agreement, however, the artist only has the right to inspect the production company’s books unless the artist is able to successfully negotiate his right to review the record label’s books directly.

2. Nonexclusive Producer Royalty Deals

In the case of nonexclusive royalty deals, the producer fee is usually based on a per master basis, payable “from record one” (unlike artist royalties) from the artists’ royalty account upon recoupment only of all recording costs, including the producer fee. Depending on experience and reputation, a Producer royalty can vary over a five percent range (a little less on a p.p.d. or price per dealer basis in the U.K. ). A producer’s royalty rate also may be increased at specified sales plateaus ( e.g., each 500,000 record sold). This royalty is generally computed on a “pro rata” basis, which means it is based on the number of tracks used. Yet Producer Agreements also frequently include some form of “spec royalty,” whereby the Producer is paid if a deal is secured within a certain period of time even if the masters are not used. Artists also usually request that producer royalties be calculated on the same basis as the artist, including the same deductions for “packaging”, “CDs”, and “free goods,” and track the lower royalty rates paid to the artist in the same proportionate reduction ( e.g., lower royalties from foreign, budget, and mid-price sales.).

Producers also often are entitled to an advance against these royalties, much like an artist. Depending on the experience and reputation of the producer, the fee per master can be up to $15,000 or higher.

Other significant considerations in nonexclusive Producer royalty deals are whether the Producer will own any portion of the copyright. This usually depends on the amount of involvement the Producer has in the songwriting. Where the Producer does not own the copyright (and the Artist signs directly to the record label), the Producer Agreement also should include provisions for audit rights and credit on the album.

Final Considerations: Do the Right Deal for the Right Situation

The production scenario most likely to occur when an artist gets signed must be carefully considered when drafting these agreements. Specifically, you want to be sure that your demo deal is within a range acceptable to a potential future record label, or you at least need to be in a position to revise the agreement within the label’s acceptable framework when/if needed. For example, over one year after negotiating a deal, I once had to change a retail-based deal to a P.P.D.-based deal when an independent label mentioned that it did not have the retail accounting ability. Also, if a band’s producer is taking too many points and/or is not skilled enough for the label to permit his work on the final release, this can prevent an album from being released altogether. In this situation, both the band and the producer lose. The producer doesn’t get paid, and the band doesn’t have a career.

In sum, you should advise your client to get paid in cash when immediate cash is all that a particular project will likely receive. If an artist requires significant development, an exclusive Production Company agreement may be appropriate. In other circumstances, you should prepare a nonexclusive deal that protects a producer from the myriad loopholes that an artist or label lawyer can dream up, while at the same time keeping the agreement reasonable enough as to not preclude the artist from being signed, or the label from using your client’s services in the future. Finally, add all these considerations into the mix while billing for a three page contract. Unlike producers, it seems, lawyers just don’t have the luxury of putting on their pants one leg at a time.

This Blog contains information of a general nature that is not intended to be legal advice and should not be considered or relied on as legal advice.  Any reader of this Blog who has legal matters involving information addressed in this Blog should consult with an experienced entertainment attorney.  This Blog does not create an attorney-client relationship with any reader of this Blog. This Blog contains no warranties or representations that the information contained herein is true or accurate in all respects or that it is the most current or complete information on the subject matter covered.

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