“There is nothing more rewarding for a director than being able to collaborate with a creative producer, and there is no better marriage on film or tape than that of a producer and director who collaborate brilliantly.”
—Jeff Margolis, Director
The producer is the creative force behind a project. I repeat with emphasis: The Producer Is The Creative Force Behind A Project. Contrary to popular belief (and certainly the belief of most film schools) the director is not the only creative force behind a project, unless of course the producer entirely relegates that responsibility to the director. Creating a project for film or video is a collaborative effort. It is not like the world of the painter or sculptor who creates alone and then, when finished, the work is presented to the public. It is an art form that requires the collaboration of individual people, each creatively contributing to achieve the end result of the creative vision.
Before anyone else, the producer must know the end result of the project and know what path the project will take after it is completed. This is necessary in order to understand how to guide the various creative contributions to the project. What is its audience? Does it have a limited viewing life? Is it limited in the marketplace by the creative context? Will it be made specifically for one market or another? The producer also has a creative responsibility to try to provide the original investment with return. How will that be done? Will any investment be returned? The end result of the project and its use must be foremost in the producers’ mind.
Documentaries are primarily commercially screened on television throughout the world, and many private screening houses are now able to project large screen video. Does this mean that the documentary should be produced entirely on video, or are there creative and aesthetic reasons that require it to be photographed on film and completed in video? Original production in video is less expensive than film but the creative aesthetics between film and video are significant. Perhaps the producer wants the documentary to have moments that feel like the 1920s and decides that the film medium would give the right creative aesthetic element. Therefore the planning for this project would include a creative element.
The story of a narrative project involves a gay relationship between a punk rock musician and a hip-hop musician. Although the characters are well developed and the director believes that the relationships between the two characters are universal, will the project, because of its subject matter, ever see the light of day with distribution? And if it did, what type of distribution would it receive? Will it be an underground or art house project? Or will it make it to the public’s eye at all? What is the probability of total investment return?
The concept of focusing on the projects’ creative end result and use is an important tenet of producing. This is not an original notion, since the Screen Actors Guild and the Directors Guild of America structure their agreements based on the end use of the product. The concept of end use is one you will be directed to many times as you go through this written diary on independent producing. But first we need to consider independent funding for the project.
You have the project, the idea or the vision and now you must give it life. This begins in the Development Phase. This is the period in which the funding comes together. If funding is coming through a studio or other production company, you will work within their dictated guidelines. But if you are raising independent funds, it is often through a legal construct—such as a private placement document or private partnership. These documents must be prepared by a qualified attorney and structured so that the producer, the creative force, is fully protected against any personal liabilities regarding the project. The producer who usually brings the project to the structure is contributing his or her creativity to the arrangement. The clearer this is within the context of the document the more respect potential investors will have towards the integrity of the project. Inexperienced investors often look to see if the producer has his or her own funds at risk before considering investing. They will need to be educated concerning the structure of a film or video project investment and the value of a producer’s creativity to the package.
Once the contribution relationship between producer and investor has been clearly explained and defined in the body of the partnership document, there are five questions always asked by investors.
The partnership document must contain the answers to all five of these questions, as they define the risk to the investor and the depth of the creative producer’s motivation.
This one is easy to answer. The investment is the negative cost of the project with negative cost being defined as the amount of money necessary to come to a completed composite answer print of the project. The negative cost can include the hard cash dollars used on the project as well as any arranged deferred costs. Deferred costs are expenses applied to the project that are paid at some mutually agreed upon time after the completion or during the distribution of the project. The investment proposal may discuss the overall investment and what minimum units of investment might be fashioned as a part of the overall investment. Or it may indicate what sort of investment may be shaped and in what form. But the bottom line is that it will declare how much money is needed to make the project.
This brings up one of the big fallacies in the industry as it applies to producers. How can the producer know how much the project is going to cost before it is made? When you are buying a house, the investment is based upon predetermined information. The same should hold true in a movie or video project. But unlike the purchase of a property, the producer—due to lack of knowledge or experience—may first ask various people to provide him or her with information before setting the cost of the project. The unfortunate process for inexperienced independent producers is (all to often), to hire a production manager to create a budget for the project without any dialogue as to the creative producing of the project.
Production managers are not producers, although some may be line producers. They manage the day-to-day operations of film production. They are not involved in post-production, or above-the-line decisions of a project. They have not set the creative or philosophical approach to the producing of the movie, nor are they required to completely understand the demands of a director. So why are production managers asked to prepare budgets? Or more importantly, why would a “soon to be” producer trust the budgetary figures that a production manager provides them with? Production managers will always budget to protect the downside of their job. They will always ask for more dollars than are necessary for their area of responsibility and shortchange those areas that they do not know well or are unfamiliar with. There are not many rules in production, but there is one that is constant about the process of production. “What you do not plan for in pre-production affects production, and what you do not do in production affects post-production.” This chain reaction is what causes any project to go over its budget. So why take a budget prepared by a production manager as gospel as to what the film will cost?
Studios have budget departments that, after reading a screenplay, prepare a budget that is presented to the producer as what the film should cost. Thus studios require producers to be responsible for keeping a project on a budget created by people who have never before made films. Does this make sense? During the development phase of The Girl, the Gold Watch and Everything, I prepared a budget based upon the first draft of a screenplay, knowing that I had to keep it within the licensing fee of $1.6 million dollars paid to the studio. The studio’s Budget Department prepared a budget for the same screenplay. Their budget was $2.6 million dollars. I was told by the studio to have the script rewritten so that it could be made for the license fee. I remained firm on the screenplay as written and presented them with my budget created from the same screenplay (and my production board), reminding them that I was responsible for the producing decisions on the film. The project came in at $1.37 million dollars.
This is another easy question to answer. The document should clearly spell out what percentage of the film’s profits that the investment dollar or any portion of the investment dollar is to receive. Do the investors (often referred to simply as “the money”), share in 50 percent, 70 percent, 30 percent of the profits? Do the first investors who invest in the project (commonly referred to as “first money”), get a higher return on the investment than those who are partially motivated to invest because others have done so? (The thought being that first money is almost always the most difficult to raise.) Whatever the deal may be, it needs to be clearly spelled out in the investment package.
There can be many different types of profit structures each reflecting a different psychological factor to the investment. As an example, a first-time producer may take a smaller share of profit participation, offering investors the larger share as an incentive to invest. Or, the producer might structure their share of profit participation as the source for any profit participation that must be given to secure talent. Or profit participation to secure talent can be taken from the total before investors and producers take their participation. The independent feature Hunter’s Blood1 was budgeted at $850,000. It was a genre project, a clash of cultures type of adventure/horror film. Practicing the “End Result Use” tenet, research told us that the project could have a high probability of a return on an investment of this size. It would, of course, depend on the quality and creativity of the producing. We decided to interest passive investors in the investment (a passive investor is one who has never before invested in a motion picture project), who turned out to be a group of doctors from Central Florida. They were a bit shy to invest cash, as they were unfamiliar with entertainment industry investments and it wasn’t like investing in a piece of land that you can go to and touch and feel. So we had to find a method of investment that would provide them with the security, and convince them that this particular deal was a low risk investment. We brought in a bank which would provide the funds against letters of credit that were issued by the investors through their respective financial institutions. This gave the group of doctors the psychological security of knowing that a bank had reviewed the investment (Hunter’s Blood) and had decided it merited the funds against the letters of credit collateral. The bank was not at risk as they had the collateral in place. The investors were more comfortable knowing that another financial entity had reviewed the investment package and decided that the people involved could deliver. The burden of this investment fell to the production, because in order to pay the interest on the loan, we had to factor in another $150,000 onto the negative cost as a bank fee should we have needed to pay the bank back through the end of the terms of the loan. Therefore, through our investors we needed $1,000,000 in letters of credit for the bank. One of the major responsibilities that a producer has when doing a project is to maintain the integrity to the investors and to recognize that the “business” end of the phrase “show business” is equally as important as the “show.” When the picture was completed the negative cost was $750,000 and the bank was paid back within one year of the completion of the answer print of the picture. The letters of credit were never called, the bank received interest on the money, the investors received their percentage of profits and the picture was a success.
In another film proposal, the producers were making their first film and needed to find a mechanism to entice investors to believe in their project. Although they had not done all their homework or research in terms of examining ways to reduce the risk to the investors, they were able to raise the funds by structuring the proposal as a 75/25 percent split between investors and producers with any participation points given from the producers’ side. This was further enhanced by allowing the investors to recoup their investment plus 15 percent before there was any profit participation. To the investor this is a very good deal. Now all the investor had to think about was the earnestness and passion of the producer and creative team that was being put together since the return to risk ratio was in the investors’ favor.
Although film and video investments may appear to be very businesslike, emotion almost always enters into the partnership. With emotion comes ego, with ego comes motivation and since the producer has to appeal to the investors to get the project funded, the producer should define how the investment is put together.
The answer to this question is a bit more complicated. The payout to the producer from any project has its greatest return within the first eighteen months of the life of the project. That is to say, assuming that upon completion of the answer print, a path for distribution and release has been set in motion, the terms of distribution usually reflect the largest revenue coming back to the investors within the first eighteen months of the life of the film. There are several reasons why this is so.
During the first year of the project’s completion, distributors provide reports to the producer monthly. The second year, the reports are made quarterly. By the third year, the producer should expect reports biannually. The major thrust for a project in whatever primary markets are determined happen immediately upon the project’s release, while ancillary markets such as television, cable, videocassette and DVD may be scheduled sometime after the initial release. All of this usually happens within the first eighteen months of the life of the project.
Advances can also be negotiated regarding any of the avenues of distribution, which will have a direct impact on the percentage of distribution or release fees that will be levied against the product. If these advances are in the form of guarantees made by distributors during the development phase of the project, then the producer is able to unequivocally state when any portion of the investment will be able to be returned to the investor.
However, this type of situation puts a certain amount of fiscal responsibility on the guarantor, or distributor, and therefore the producer usually agrees to other incentives for the distributor when the project is completed. The incentives may be in the form of a high distribution fee taken upfront, total recoupment of the guarantee plus interest, equity participation, creative input or control in the project, or any or all of the above.
The producers of The Clonus Horror received a $100,000 advance from their distributor upon delivery of the answer print for distribution. On the surface of it, this seemed to be a fair deal. Not a great deal, but a fair deal, as the picture only cost $250,000 to produce. However, the young producers were not familiar with all of the nuances of distribution and discovered that the distribution fee was higher than it might have been without the advance. Also the distributor charged interest on the advance based upon the prime rate in any year. So although almost 45 percent of the investment was returned within three months of the investment, the balance of the investment took longer to receive. Looking back on the twenty years since its distribution, the profit to the investors would have been sooner and greater had there been no advance.
On the low budget feature Crime Task Force ($450,000) the producers did not offer the investors any guarantees or make any warrantees as to when the investment would be paid back. They wanted to return the basic investment as quickly as possible to their investors so they could ask them for funds for a second film. In so doing, they negotiated a $250,000 advance from the foreign market and a $200,000 advance from the domestic market which covered the negative cost of the film, paying back the full investment. But the foreign distributor took a large percentage for a distribution fee and the domestic distributor retained all domestic rights (including any ancillaries that might have been available such as videocassette, DVD etc.) Subsequent funds came in to the producers after the first release of the film, but the percentage return to the investor was much lower than it could have been had the producers not decided on the advances.
Negative Pickup–A term used to describe an agreement between a film’s distributor and the producer, whereby the distribution company agrees to pay a fee for the rights to distribute said film. The fee typically is not paid to the producer until delivery of the completed and cut negative. (This is the opposite of pre-production financing.) If the pick-up deal is with a major studio, the producer can usually take the agreement to a bank where it can be discounted (e.g., converted into money for a fee). Many productions are financed, or partially financed, this way.
So Question #3 begins to introduce to the producer some philosophical decisions that must be dealt with in relationship to the project. The producer must ask some questions: “How badly do I want these investment dollars? How much of the creative element am I willing to give away? Is it a wise decision to get advance guarantees to secure the investment if the investors’ opportunity to recoup or profit potential is decreased?”
More money! More money! More money! This is the producer’s undying cry as the film gets into production and the funds are being used up quickly. The investor wants to know if the producer is able to make the project for the original amount that the producer warrants is needed for the project. This is a fair question. The investor wants the assurance that the investment isn’t going to be sold off later because of the need of funds for its completion. Certainly, you can talk to the investor until you are blue in the face, trying to convince them that you know what you are doing and that you are absolutely sure that you will not need more money to complete the film—in spite of the fact that your director has a reputation for being slow and not completing a scheduled day’s work, and your director of photography loves to “paint” with light until the image is absolutely perfect because that is how they did it in film school. Unless you know how to successfully use the word “no” with these and other situations, you will need more money! So don’t fool yourself. Protect the investment and find a method that will assure and guarantee to your investors that you will not need more funds to complete the project. This can be done by using a completion bond. The completion bond is an insurance policy purchased through a qualified company made up of certified experts in film and video production. After they have analyzed the documents in the application package—including the script, production board and budget—they will provide a letter stating that in their opinion the project can or cannot be produced in a first class distributable manner. If it can, they will state their willingness to provide the completion bond. If for any reason the project is being produced badly, or the money is being used unwisely in the producing of the project, they, as overseers, will come in and complete the film at their expense. Their letter should state this information as it will provide confidence to investors and provide the answer to Question #4.
If it is that simple, why doesn’t every project have a completion bond? Because not every project is bondable! Bonding companies in reality, do not bond (insure) projects; they bond (insure) the people making the project. The last thing in the world a bonding company wants to do is take over a project. So they look to the people making the project as to being reputable, knowledgeable, creative and (they hope) experienced. It is therefore difficult for a first time producer to obtain a bond on a low or medium budget picture. A first time producer may have to align with a bondable commodity such as a director, co-producer or line producer with a positive track record. Bonding companies are primarily concerned with the preparation and production aspects of a project because production can be, and usually is, volatile. The post-production phase is a more fixed and controllable phase at which time the responsibilities of the bonding company may be (but are not always) relieved. Does this assurance for the investor come cheap? No. Is it necessary? Probably. Bonding companies routinely charge 6 percent of the project budget as a bonding fee; if there is no contingency in your budget, they require at the least a 10 percent contingency before determining their 6 percent fee.
As an example: If a project’s budget is $2,000,000 and does not contain a contingency within the total amount of the budget, then an additional minimum of $200,000 must be added. The bond fee of 6 percent is then calculated on a budget of $2,200,000, thus adding an additional $132,000 to the budget as a fee paid to the completion bond company. The cost of the project has now been increased by $332,000 to $2,332,000.
However, bonding agreements are negotiable and various terms can be discussed and negotiated as part of the agreement. These terms include such items as the working relationship with the producer, terms and conditions of invading the bond, procedures regarding expenditures of budgetary items, and the bond fee (some of which are discussed in Chapter 4).
This is the question that requires the most puzzled answer of all. Because you don’t know! But there are various elements you can pursue that will increase the likelihood of it getting into the marketplace.
Each of these circumstances requires the producer to carefully consider any particulars that may arise. Again by example, should the project include a person with a track record, the back end participation (commonly referred to as “profit points”) may be part of the relationship and affect the way the investment is structured. It may very well be that investors are deciding to invest because a writer, director or producer has a proven track record that would logically dictate the purpose of the project. The difficulty in this situation may come from the working relationships of these three people, as they must all have a clear and unified understanding of the vision for the project so that their efforts do not conflict with one another.
If the producer determines that the project needs a viable actor to insure its marketability, a difficulty may arise in acquiring distribution. Although the producer’s research might indicate that having a “name” actor tied to the project may ensure distribution, the reverse may also be true. Distributors may decide that the particular actor tied to the project is wrong for the project and they can easily say no to the project because you have given them a way out. And, if the actor is a member of the Screen Actors Guild, and unless you have structured the actor’s relationship to the project in a certain way, the actor is paid for the project whether or not it is produced since SAG actors work on a pay-or-play basis.
If the producer agrees to a distribution deal during the development phase of the project, the deal will probably be a healthy one for the distributor and a not-so-great one for the producer. Distributors believe that their involvement makes the project viable, so they negotiate for a larger distribution percentage than they might receive if the project did not need their association to secure the investment. Further, it is not unheard of for the distributor to be involved with the creative side of the project if that relationship is required for investment.
If the producer throws the dice and goes with their belief in the project, its characters and its story, the producer is then in the strongest position creatively, but distribution will rest entirely on the integrity of the work. The producer must convince investors the project will be successful in the marketplace, and will include the right actors, director, writer, cinematographer and composer, all of which will help maintain the quality of the work and motivate distributors to put the project in theaters or on the small screen. Or the producer must believe in the project so strongly that investors are convinced that the project will be successful on the festival circuit before getting distribution. This can be shortsighted since important festivals are getting very selective about what they accept. In other words, the producer is selling integrity to the investors and attempting to set up a level of trust and mutual respect. This is the toughest road to go since it is built on dreams and passion but it can also be the most gratifying to the producer.
As you can see, the answer to the last question is the most complicated and has a direct correlation to the answers for the previous four. However, if you present these answers clearly in your investment document, your investors will be willing participants.
“When dealing with studio ‘suits’ the real job of a creative producer is simple: lie. Lie like a dog, lie like a rug, lie, lie, lie. Say whatever it takes to get executives out of your way so you can get your project made the way you want. Mostly, this involves the old Hollywood standby—telling them what they want to hear: ‘I promise you it will have male appeal’ (and it does!), ‘If it comes in over-budget, you can take it out of my salary’ (but it never does!), ‘I know for a fact that the scene will work when its on its feet’ (and it does). Don’t ever tell them what it will really cost, or how long it will really take to shoot (because they have no imagination or creativity and don’t really know production anyway). Once it’s made, there’s nothing they can do. If it never gets made, there’s nothing you can do, except learn from your ‘truth mistakes.’ In addition, one of the fringe benefits of professional lying is how powerful the truth can be. Once, when I was executive producing a sitcom for Fox Television, we were called into a meeting to explain how we’d fix the show in order to get (a pickup of) the coveted back nine episodes. The show was hanging by a thread, and my studio execs (which studio shall remain nameless), were tap dancing their asses off to get the network to give us the order. I listened silently for an hour, then made my move. I told the network president the truth: that the show sucked. ‘It’s about flight attendants, for God’s sake. We’re barely getting the show to stick to the videotape, and the only thing we can tell you without bullshitting you is that we can try a little harder.’ There was a long pause as everyone in the room stared at me as if I had just killed their mothers. The network president looked at us and said, ‘Thank you. This meeting is over.’ No one from the studio spoke to me for the rest of the day. But the next morning, guess what? We got the back nine. Sometimes it actually pays to tell the truth. Who knew?”
—Jamie Wooten, Producer-Writer, The Golden Girls, The Five Mrs. Buchanans, For Your Love
1 The creative nature of Hunter’s Blood is discussed in the book Men, Women and Chainsaws, Modern Horror Film Genres, by Dr. Carol Clover and published by Princeton University Press.