Since it’s now damn near impossible to get a deal with a major record label these days, you decide that you’d rather release Suzy Singer’s album independently! You believe that she will be the next big superstar and you’ve been advised by your entertainment lawyer that you need to sign her to an exclusive recording agreement.
Up to this point, you’ve spent your own hard earned cash paying for studio time, producers, vocal lessons, etc. for Suzy and believe she’s recorded some potential hit records.
FIRST RULE – until Suzy is signed to an exclusive recording agreement with your independent record label, DON’T give her copies of the completed songs! Why? Because you don’t want her playing the songs for other artist managers or record label executives that may want to “steal” her from you. This happens more often than not and you don’t want to be that record label owner who’s spent time and money grooming a recording artist and is later shocked when that recording artist calls and says, “Thanks, but I got a better offer!” You might be able to get a “thank you” credit on the liner notes of the album and maybe some of your investment monies back (not!).
Therefore, before you spend any money on Suzy, have her sign an exclusive recording agreement (“ERA”). An ERA is an agreement between a record label and a recording artist in which the recording artist gives the record label the exclusive right to record, market and ultimately distribute recordings featuring the performances of said recording artist. In other words, once signed, Suzy can’t go and record music for Universal Records, for example, without your permission. In signing her to an ERA, your entertainment attorney will make sure the following main points are included:
1) Term: Because you’re going to spend a lot of money producing and recording Suzy’s first album, you want to make sure she is signed to your record company for as long as possible. The ERA will contain language that will allow the record label to have a number of options to require Suzy to record and deliver additional singles and/or albums. If Suzy’s first album release is not successful, but you still believe in her, you want the option to be able to record another album which, if successful, will give you an opportunity to recoup your initial investment.
2) Advance: The ERA will contain a provision in which your record label will make an upfront payment or advance to Suzy usually upon execution of the agreement with an additional advance payment when an album is satisfactorily delivered to the record label. An additional advance is also payable upon exercise of the option for a subsequent album. It’s advisable that a modest advance be payable to Suzy when the artist signs the ERA. This advance is “recoupable” meaning that before Suzy can be paid royalties on sales of any singles and/or albums sold, the record label must first be able to recoup the advance, recording, marketing and promotion costs associated with the project. If you’re a recording artist, keep your day job because, these days, you’re not going to be able to live off the advance.
3) Royalties: The ERA will contain a royalty provision which states the record royalty that Suzy will be paid on sales of the singles and/or albums. A royalty is usually defined as a percentage of the suggested retail list price (or its “published price to dealers” equivalent) of the single and/or album sold. Since Suzy is a new recording artist, her royalty will range anywhere from 12% – 14% and each royalty percentage or point is roughly equivalent to $0.08 – $0.10. So if Suzy is being paid a 14% royalty, she is receiving approximately $1.12 – $1.40 per album sold. This royalty is sometimes described as an “all-in” royalty because a record producer (and possibly a mixer and/or engineer) will be paid his producer royalty (usually 3% [or roughly $0.30] if a new producer) out of Suzy’s 14% royalty. So that $1.40 royalty would be reduced to $1.10. Because all the costs associated with the recording, marketing and promotion of the album is recouped out of the artist’s all-in royalty rate, Suzy’s royalty account will probably remain in an unrecouped position and she may never actually receive a royalty check! In order to see a royalty check, she needs to sell records like Adele!
4) Merchandising/Co-Publishing: The ERA should also include a merchandising clause which will give your record label the exclusive right to use Suzy’s name and likeness in manufacturing and selling merchandise like posters, t-shirts, baseball caps, etc. Net profits generated from merchandising sales is usually split 50/50 between the record label and the recording artist. The ERA will also include a co-publishing provision which would allow the record label to be the exclusive administrator and co-owner of the artist’s songs. This is an important provision because if Suzy writes or produce her own songs, the publishing income generated from the commercial exploitation of the songs could be substantial.
5) Ancillary Rights/360º: Lastly, the ERA should include an “ancillary rights” provision. Also known as a “360º clause,” this provision allows the record company to participate in the non-record related revenue generated by the artist from activities such as touring, sponsorship endorsements and acting. 360º provisions are a relatively new phenomenon having been adopted by the major labels in the past few years because CD sales were declining as a result of online piracy. The usual percentage that the artist will have to pay to a record label usually ranges from 5% – 20%. As an independent label, this is a clause you will want to insist stays in the ERA because it increases your chances of recouping (and profiting) all the money you’re about to spend blowing Suzy up!