The Class A or Development Budget Investor is placed at extremely high risk. The development funds are spent immediately for items such as casting directors, legal fees, securities and other filing fees, pay-or-play deposits, etc.. Conversely, the Class B Investors’ funds are generally deposited into a holding account until a defined minimum amount is raised. Once the minimum amount is raised, the funds are transferred to the production’s operating account. If the minimum amount is not raised, then all funds are returned to the Class B investors without interest. Therefore, the Class B investors are not at risk to the extent of the Class A investors, whose contributions are spent right away. In light of the above, I would suggest the following rates of return for the various Investors. Keep in mind that each situation may vary. The below constitutes a general “rule of thumb” scenario.
| Class A Investors Class A Investors are fully recouped from the first profits received by the entity (LLC) for amounts that they have invested, plus a 100% return on investment (r.o.i.) thereon. For example, if the Development Budget is in the amount of $400,000.00, the first $800,000.00 in profits received by the entity should be distributed to the Class A Investors.Class B Investors Once the Class A Investors have recouped their investment and have received a 100% return on investment (r.o.i.), the next profits received by the entity should be distributed to the Class B Investors, who have provided the equity portion of the production budget. I would further suggest a 20% return on investment (r.o.i.) to the Class B Investors. Therefore, if the Class B Investors have invested $1M (over and above the $400,000.00 invested by the Class A Investors), then the next $1.2M of profits should be distributed to the Class B Investors. |
Therefore, under the above scenario, the first $2M received by the entity will recoup and provide a return on the investment for both the Class A and Class B Investors.
After all investors have been repaid and received their return on their investment, then all cash deferrals should be paid. Any profits thereafter received by the entity, should be split 50/50 between the Producer and the Investors. The Class A and B Investors should share pro-rata in their 50% portion of the profits regardless of class of investment.
Any “back-end” contingent talent profit participation is customarily paid from the Producer’s 50% share of the post recoupment/return on investment/cash deferral profits. The Investors’ 50% share should not generally be used for talent profit participation.
The Producers set their fees as producers, within the Production or Development Budgets. However, the Producers should not take a fee for managing the entity.
Of course there are many variations to the above investment scenario, but this is the scenario that I suggest to my clients, in order to make a film deal attractive to investors.