PRODUCTION TIPS: Just Know that Profit Participation Comes Out of the Producer's Pocket

I recently wrote an article about why it is a good thing for certain filmmakers making certain films to share the wealth with profit participation instead of deferred compensation. A caveat: that has a limited use. However, I wanted to revisit that idea and clarify what that means for a filmmaker looking to adopt a profit participation strategy to paying their cast and crew.

The truth is that while paying your cast and crew with profit participation instead of deferred compensation can lower a producer's and investor's out-of-pocket production and postproduction costs and improve morale/motivation, it has limits.

Here's why:
A producer makes multiple contracts throughout the life of a film starting with the writer and ending with the distributor. Along the way, she decides to offer back end participation (or net/gross profits or profit participation) to the cast and crew and signs a contract with them promising to do so. When the producer meets with the distributor, the distributor will likely tell her, we did NOT commit to pay your cast and crew a percentage of the film's box office gross, YOU did. And unless the distributor feels compelled to honor that agreement or sign a contract with an actor (who would have to be A-list for that to even be considered) promising them back-end, there is no way the distributor will pay anyone in the film besides the producer they are negotiating with. And so that means the back-end to the cast and crew is coming out of the Producer's portion. Say a distributor pays the producer an advance and splits the box office 50-50 then the producer will pay her cast and crew out of 50% of the film's earnings not the full 100%. That will probably make the investors and producers unhappy.

That's why profit participation for the entire cast and crew is really only possible with a tiny cast and crew or as one element of a varied compensation package (profit participation with some pay, credit, perks, etc.). But here are two possibilities that can make profit participation for cast and crew more palatable:

  1. Promise the cast and crew a percentage participation in the manager's share of the net revenue for the LLC (the production company for the film would have to be a a manager-managed LLC). This would leave untouched the investor's share (who are the other members of the LLC) although this would also lower the producer's share even more. OR
  2. Negotiate with the distributor so that the distributor assumes responsibility for directly paying out all net profit participation commitments on behalf of the producer. Note, this will still make the producer's and investor's pie smaller.

The key is knowing what it means to the producer's and investor's profits if she offers profit participation. If it is untenable to do because it will take too much out of the pie then stick to raising money to pay the cast and crew upfront or with deferred compensation you actually intend on paying out if the film makes money.

Danny Jiminian is a producer and attorney who specializes in Entertainment Law, Intellectual Property, Business Law and Nonprofits and practices out of New York. For a free consultation, email him.

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