by John Seay

How To Read A Record Deal

So you were offered a record deal. Congratulations! But the only problem is that now you have to read it. And there’s a lot in there. Although the entire document is significant, there are a few sections that you should be paying particularly close attention to.

Remember that, though most things are negotiable depending on your leverage, what you should ask for in your deal is a decision you should make after careful consideration, preferably in consultation with an entertainment attorney.

In my time as both a lawyer and a working musician, I've negotiated dozens of record deals. And the sections I’ve explained below merely provide an overview of the most important elements of a typical record deal. They don’t reflect the full universe of what is common in these deals and what you should or shouldn’t be asking for. But hopefully they’ll help to clarify enough of the terms in your record deal so that you can read and understand it before handing it off to your attorney.

Territory

The territory is the geographic region throughout which a label has the exclusive rights to your services as a recording artist. In most deals, the territory is defined as broadly as possible, typically as “worldwide” or “the universe.” But the territory can sometimes be defined more narrowly, perhaps as the United States and Canada. Or, it might just be Japan if you’re signing with a Japanese label but want to reserve the right to sign with a different label in the United States and Canada.

Sometimes the territory is defined quite broadly, but the deal stipulates that if the label doesn’t release a physical product in a particular territory, then that territory reverts back to the artist, providing the artist with an opportunity to seek out a new deal with another label for that particular territory. Some artists fund their own recordings and license them to record labels around the world, giving each label exclusive rights with respect to a specific territory. The point to remember here is that the territory shouldn’t be taken for granted. Think through which territories make sense to give to a particular label, but also know that it’s very common for a label to at least ask for worldwide rights. As we’ll discuss below, the concept of territory pops up again in the context of a label’s release commitment.

Term

The term is the length of time during which you must provide your exclusive services as a recording artist to the label. In most deals, there will be an initial term, and that will be followed by a few potential option periods that the label can exercise, which would extend the initial term. During the initial term and each option period, you’ll be required to deliver a record to the label. How long does a term or option period last? Typically some period of time after either: your record is delivered to, and accepted by, the label; or the label releases that record. This means that any particular term or option period in your deal could last anywhere from a year to several years, depending on how quickly you record and deliver an album and how quickly your label approves and releases it. And, there may be some additional timing factors. For example, the label sometimes doesn’t have a duty to exercise an option unless you send a notice (in the correct form – read the notice section of your deal) requesting that they exercise the option.

That means that without a notice, any particular term or option period could theoretically last forever.

Your deal may state that any options will be automatically deemed exercised upon the expiration of the previous period. As an artist, you should try to change the language to say that the label must affirmatively and in a timely manner exercise the option, and that if they don’t, then you’re free to walk and buy back your unreleased sound recordings (commonly referred to as “masters”).

Product Commitment

You must deliver a record during each period of your deal, but product commitment means you can’t just deliver a record filled with covers or finally release that noise record you’ve had on the backburner for years. Instead, your record typically must meet certain minimum requirements with respect to how many songs are on the record, the duration of the record, the materials required to be delivered along with the record, and even the quality of the record. The music is often required to be at least technically satisfactory, but sometimes commercially satisfactory too, whatever that means. Make sure the language in the deal says that if the label accepts your record, then they should be obligated to commercially release it, preferably through physical distribution (especially if the label typically engages in physical distribution), and if they don’t, then you should be able to walk and buy back your unreleased masters.

Recording Procedure

Generally, the more your label is investing in your career, the more creative control they will want. Those creative control issues pop up in several sections of a typical record deal, but perhaps most prevalently in any section discussing the circumstances under which you can record. A label looking to protect its investment will typically want some oversight, if not outright control, over who produces the record, where it’s recorded, and even the songs to be recorded. Your deal may state that you can’t begin recording until they’ve set a recording budget. That’s fine, but you’ll want to make sure that if they don’t set the budget within a certain timeframe, then the contract allows you to walk.

As with most sections of your record deal, how much creative control the label gets is a hotly negotiated item, and is one of the few areas of a deal where a good many artists are willing to go to the mat if necessary to preserve a measure of creative control.

Really though, the concept of creative control is just an excuse to discuss risk in the context of record deals. The terms of the deal you’re initially offered, and how many changes you may get upon request, are based on the related concepts of the label’s risk and your leverage. The more resources the label is throwing at you, the more they’ll want to protect that investment: by asking for exclusive rights in the broadest territory possible for the longest term possible, and participating in the broadest range of revenue streams possible. But if a label isn’t making an investment (including, if nothing else, a significant time investment), then they aren’t entitled to the same terms that a major record label would command. And even if the label is making a big investment, but especially if they aren’t, your sales history or potential may give you leverage.You can then use that leverage to negotiate more favorable terms across the board.

Advances/Recording Budget

You may be tempted to enter into a deal based on the numbers in this section alone, and certainly a big advance and recording budget are enticing.

But keep in mind that an advance is a loan that the label recoups from your record sales (and probably from other streams of revenue as well).

Advances can be useful, especially if you have a plan for the money beyond, you know, useless stuff. In a few cases, I’ve had clients request that, in lieu of the advance, the label make a specific financial commitment for marketing the record. On the other hand, even the major labels aren’t the best at proper accounting, so it can be smart to go ahead and get some money up front while you can. The takeaway for advances is that the size of the advance is truly not the most important part of your deal, even though it can be the most exciting part and is certainly still worth getting right.

As for the recording budget, this is another big one. Some smaller deals don’t even address this, as the band is expected to self-record or fund their own recordings. Sometimes the deal will simply state that a recording budget will be discussed. This, by the way, usually means that if you didn’t recoup expenses for the first record, then the recording budget for the second record will be tiny or nonexistent. If you’re relying on a recording budget, and even if you’re not, then it can be a good idea to obligate the label to commit to budgets--and, for that matter, advances--for each option that it exercises, preferably escalated for subsequent albums. Not only will this ensure that the label will only exercise an option if it plans on continuing to promote you (or at least fund your next record), but it also helps you to know what your future recording budgets are likely to be.

Royalties

After checking your advances, royalties is probably the next section to which your eyes are likely to scroll. Here is where you find out what your label is going to pay you from the money it collects from selling your music. If it’s a small or mid-sized label, then it’s likely going to be a percentage of the label’s net profits, i.e., the amount of money left over after the label recoups its investment in you. That investment includes your advance, the recording budget, etc. These days, a lot of labels will do a pure profit split, meaning they recoup costs and then equally split profits with you. Hey, that sounds fair, right? Sure, but make sure that the label’s investment is substantial enough to justify their participation.

Giving someone half of your money is a big deal. Your label should be doing its part to grow the overall size of the royalty pie, such that their 50 percent is worth it.

But some labels, especially the majors, will account to you on a different basis. Instead of recouping costs and then splitting profits, some labels will pay you a percentage of the “published price to dealer” (PPD) or the “standard retail list price” (SRLP) of the record. Recoupment works a little differently in this scenario. The royalty here often varies based on the geographic territory in which the sale occurred, the type of product sold (physical versus digital), etc. When you’re being accounted to on a royalty basis, you may receive increases in the rate you earn for each subsequent album sold in the deal, as well as, ideally, hitting certain sales plateaus, such as an additional royalty point for subsequent option albums in the deal and also half-point bumps at 500,000 units sold and an additional half-point bumps at a million records sold for each record under your deal. You should definitely consult an attorney if you receive a deal like this; there are just too many important concepts in there that need to be addressed, and not enough space to do it here.

With either method of accounting--net profits or royalty basis--you need to be clear about what expenses are being recouped and whose share they’re being taking from. You’ll want to make sure you carefully read and understand the definitions of net profits, net sales, gross profits, shared costs, expenses, recording costs, etc.

Rights

Either the label is going to own your sound recordings as a “work for hire” for the life of copyright, or as a transfer of copyright, or you will license the sound recordings to them for a period of time, typically between five and 20 years. Obviously, a license is better for you as the artist, and the shorter the better. Sometimes your right to reclaim the record is contingent upon your account being recouped with the label, often plus some premium so that the label recognizes a little profit from the arrangement. As an attorney, I’m generally fine with that as a concept. Your label is also going to either own or be the exclusive licensee for artwork and videos and any other materials created during the term and related to the masters.

Ancillary Participation

As an attorney, when I first receive a contract, I scan all of the sections, but I’m especially looking for a section that looks like this one. It may be called something else, such as Income Participation or Touring and Merchandise Rights, but the result is the same: in addition to the label participating (usually handsomely) in your record sales, they will also participate in (a.k.a. receive) money from your live performances, personal appearances, endorsements, film and television work, book publishing, etc. The label will receive a portion of pretty much any stream of revenue you may have in the entertainment industries. The logic for this participation is as follows: it’s harder to make money just from record sales, which is true, so labels are increasingly needing to participate in other revenue streams in order to justify their investments--especially since, in their eyes, your value as an artist is your ability to grow their business in other ancillary areas as a direct result of their investment.

This all sounds nice, and there is some truth in it, but it doesn’t hold true for every label. To figure out whether your label is justified in receiving that additional participation, a.k.a. profit, we need to go back to the concept of risk versus leverage. After all, the more money a label is investing, the more concerned they may be about recouping their investment, and the more handsomely they may want to profit if they do. But if the label is only making a small investment or--worse--no investment at all, then it’s hard to see why they’d be entitled to this additional participation. For example, a label that is offering no advance, no guaranteed recording budgets, and is handling public relations in-house might not have enough skin in the game to justify participation in these streams. Keep in mind, too, that if you have a manager, then you’ll also be paying your manager a percentage of these same revenue streams. Your attorney may be taking a cut, and your booking agent, too. If you add all of those likely commissions up, then you’ll see why it’s very important to get this section right.

Given that, there are quite a few ways in which you can approach a section like this one. You can try to limit participation by the label to anything over a certain amount. In other words, the band would keep a pre-negotiated amount of money per month and the label would only receive a portion-- of any money the band earns that exceeds that amount in a given month; usually that portion is around 20 percent, but you should try to get the percentage as low as possible. Sometimes an artist or attorney can negotiate to limit the streams in which the label participates. For example, make sure that your day job (e.g., sound engineer) isn’t commissionable by the label. You can also often carve out some expenses and revenue streams from the label’s participation, just as you would in a management agreement.

The last point I want to make in this section, and any other section that discusses participation by the label in revenue streams other than record sales, is the following: you want these accounts to not be cross-collateralized. Cross-collateralized means that these accounts are used as a source of recoupment against other parts of your deal.If those accounts are cross-collateralized, then your label can use any money coming in, whether related to merchandise, publishing, live performances, or endorsements, to recoup its expenses in any other area of the deal, like expenses related to manufacturing records. That means that the label could take as much as 100 percent of your live performance revenue until they recoup all expenses, which, even with the additional revenue streams, could take a while. That would deprive you of your steadiest source of income, even while you continue to have to cover some touring costs yourself after paying your label and the other professionals in your life their respect commissions.

When negotiating a record deal, do not agree to cross-collateralized revenue streams.

Merchandise

Merchandise is another revenue stream that labels will likely try to participate in. Often, the label will ask for the exclusive right to make and sell merchandise (subject, maybe, to some reasonable creative approval by the artist). If your label is requesting this right, then you should ask whether the label has the ability to manufacture and distribute merchandise in-house. If they don’t, then they’ll likely just be licensing the same rights they’re getting from you to a third-party manufacturer and distributor. Especially with smaller labels, I generally don’t like granting exclusive merchandise rights. There’s too much at risk there. I’d rather grant the label the right to create a few exclusive designs, or fold merchandise into the ancillary participation section. If the label insists on full rights here, then pay close attention to what your royalties are and how they’re calculated. Then, negotiate away. You should fight hard to prevent merchandise revenue from being cross-collateralized with other parts of your deal.

Mechanical Royalties/Controlled Compositions

This may be a pleasant surprise to you: the label has to pay songwriters an additional royalty for the privilege of including their compositions on the label’s physical and digital products. That royalty is called a “mechanical royalty.” If you’re a songwriter, generally the label will negotiate to pay you a smaller percentage (pretty much always 75 percent) of the “statutory rate,” which at the moment is 9.1 cents per composition for physical records. So, if you wrote 100 percent of the songs (a.k.a. “controlled compositions”) on your 10-song record, then if you agreed to 75 percent of the minimum statutory rate, and the label pressed 500 vinyl records, you’d receive an additional payment from the label of $341.25. Now, if you have signed a net profits deal, then often you’ll be asked to waive your right to receive mechanical royalties in exchange for the 50 percent participation. Sometimes you can negotiate around this, or at least provide for a mechanical royalty to be paid, even if just as an additional recoupable advance, in the event that you sign a deal with a publishing company. Sometimes there’s a per-album cap on mechanical royalties. If the label does pay mechanical royalties, then make sure that those royalties, along with any other publishing money, aren’t cross-collateralized with other parts of your deal. Again, you never want cross-collateralization.

Publishing

In the context of a record deal, a label participates in publishing if it either owns your publishing or a percentage of your publishing, usually with the right to solely administer that publishing, or receives a percentage of the money that your publishing generates. Usually you’d only ever consider assigning any of your publishing rights to a legitimate publishing company, not a label. And for that reason, it used to be unheard of for a label to participate in publishing, much less own your publishing rights. But these days, it’s fairly common.But that doesn’t mean that this section isn’t hotly negotiated. Whether you can remove--or at least diminish--the label’s participation in publishing depends, as it must, on the label’s risk, its way of doing business, and your leverage or lack thereof. Of the many reasons to try to strike the label’s participation in publishing altogether, one of the most significant is that signing over your publishing to a label (which may or may not even have a legitimate publishing department) prevents you from signing a separate publishing deal down the road. And if your career takes off, that future deal would almost certainly be for more money. Generally, you’ll see the term “co-publishing” in this section, which sounds better. But it’s essentially the same thing, since the label has 100 percent administrative control over your catalogue in both scenarios.

If the label won’t budge on removing their participation in publishing entirely, then you can try to push it to the Ancillary Participation section mentioned above, so that the label only receives a percentage from your publishing revenues, but doesn’t have administrative control. If the label doesn’t go for that, then you can ask for separate publishing advances and all of the same stuff you’d ask for in a standard publishing deal with a legitimate publishing company. There’s a lot going on with publishing, so it’s definitely best to consult an attorney on this matter. As with merchandise, you should fight hard to make sure that publishing income is not cross-collateralized with any other part of your deal.

As a final note, remember that if a record label is obligated to pay you mechanical royalties, then by taking a piece of your publishing they are directly reducing the amount of money they are required to pay you in mechanical royalties. Sometimes a label can even offer you a small advance in exchange for your publishing rights, which may sound good until you realize that the amount by which they are reducing their obligation to pay you mechanical royalties offsets and then some the amount of the advance.

Side Artist

Remember that your recording and professional services in the entertainment industry are typically exclusive to the label during the term and throughout the territory. But as a professional musician, you may want the flexibility to perform as a session musician, play as a hired hand in another band, or produce or engineer a record just to make some extra money. You’d need permission from the label to do any of that stuff unless you pre-clear those activities in your deal. Labels typically agree to these provisions as a matter of course, so make sure you ask for them.

Your deal will most likely contain other important sections that aren’t discussed in this breakdown. For example, there will be an accounting section that will govern how and when your label pays you. Make sure you have clearly defined and industry-standard audit rights. There will be a section that outlines the promises you’re making to the label, and there will be a section where you agree to reimburse the label for the costs of any lawsuits that arise if it turns out you weren’t telling the truth, whether intentionally or unintentionally, about those things. If there’s physical product, then there will be a section discussing purchasing it from the label,or whether the product will be given to you for free as a form of tour support). There may be a section about websites and how much control the label has over them. If you play in a group, then there may be a section pertaining to group issues. All of that language, even the boilerplate stuff at the end of the deal, should be carefully reviewed.

Look, I get it. I’m sure it seems like this stuff was invented just so attorneys like me could have jobs. But you don’t want to curtail your career before it even begins by signing an onerous record deal, just because you want to be on a label and/or don’t want to take the time to understand what you’re signing.

Get help if you need it, and proceed with caution.

By John Seay, distributed under a Creative Commons CC-BY license.