Thursday, November 7, 2013

What Does a Million Dollar Spec Sale Really Mean?

You read in the trades that a screenwriter just sold a spec script for a million dollars. Lucky guy. That means he’s rich, right? Not quite. I’d like to use this hypothetical to explore how the business of being a professional screenwriter works.

Let’s assume the number quoted in the trades was accurate – never a safe assumption; people tend to exaggerate the size of deals. But even if the one million dollar figure is correct, it isn’t what the writer will be receiving immediately. Usually what’s reported is the total maximum value of the deal. Some of the money is guaranteed. Much of it won't be.

First, a lot of the money in a contract of this size will likely be in the form of bonuses. Often the writer receives a “production bonus” when a script goes into production. They may also receive “box office bonuses” if the movie hits certain box office thresholds. Frequently these bonuses are contingent on the writer receiving credit on the movie. Sometimes if the writer receives shared credit, the amount of the bonus is reduced. If this is a WGA deal (at this level it should be) then credit will be determined by the Guild. The good news is if the writer sold an original spec, then they are guaranteed at least a shared “story” credit.

For the purposes of our exercise, let’s say half the million dollars is in the form of bonuses. That means the actual sale price of the script is $500,000. Not bad, right?

It isn’t bad at all, but chances are the writer hasn’t actually sold the script. More likely they’ve “optioned” it, meaning they’ve entered into an option/purchase agreement. With these agreements the buyer purchases the exclusive right to buy the screenplay for a specific period of time. But purchasing the screenplay is optional, not required (thus the name of the deal). Studios usually don’t actually exercise the option (i.e. buy the script) until the last possible moment, ideally well into pre-production after the film has a green light.

The component terms of an option/purchase agreement are variable, subject to some Guild minimums, but let’s imagine a typical big-studio option deal.

We’ve said the purchase price of our hypothetical script is $500,000. The amount actually paid to option the script could be anything really. In a studio deal, 10% is pretty common. That means in this case the writer would be paid $50,000 against the purchase price. The usual period for such an option is one year. If the studio wants to acquire the script in that year, they pay off the remainder of the purchase price, in this case $450,000. If they don’t, the writer gets the script back and keeps the $50,000 (this is the benefit of the option concept for the writer).

Frequently option agreements contain a renewal clause where the studio can renew the option for an additional year for $50,000 more. This second payment is not typically against the purchase price, though. So if the studio buys the script in the renewal period, the writer would make $550,000 total. If they renew and don't buy, the writer gets $100,000 and regains possession of the script at the end of two years.

Remember, all this is negotiable. The option payment doesn’t have to be 10%. Independent producers will frequently want a “free option.” They aren’t really free because for a contract to be valid both sides have to receive something of value. So the writer is paid a dollar or maybe ten dollars. This gives the producer the right to shop the script for the period of the option without worrying someone will do an end run around him.

If you do a free option, it’s best to keep the option period short – maybe six months. If a producer can’t do anything with the script in six months, they probably can’t do anything in a year. Free options often contain renewals, but usually the renewal requires a bigger payment – perhaps 10% of the purchase price. If the producer has successfully raised some interest during the first option period, they'll be willing to pay to extend the option.

But for the hypothetical we’ll assume our guy got his $50,000. Not too bad, right? But he doesn’t get to take that home. First he has to pay commissions. His agent will get 10%, or $5,000. His manager will most likely also get 10% - managers’ commissions are variable, but 10% is typical for writers. So there goes another $5,000. The writer’s attorney is a bargain at a typical 5%, or $2,500. WGA dues are 1.5%, or $750. Many new writers get upset about paying Guild dues, but when you get a residual check or free health care you realize dues are worth it.

That leaves $36,750 for the writer. Of course, he has to pay taxes on that. Taxes tend to be high for this kind of income. Working screenwriters generally form loan out corporations to help reduce the tax hit. Loan out corporations are legal entities that receive payment and then “hire” the writer so as to spread out their income over the course of a year, rather than having it hit in big chunks. They also have advantages for creating pension plans and a few other things. Your accountant will help you set up your loan out corporation when you need it (you’ll have to pay the accountant for this service, of course, along with annual fees and taxes for maintaining the loan out corporation).

Let’s say our writer is going to pay 30% in taxes on his income. He’ll be left with $25,725. If he's been temping or waiting tables to make ends meet while he writes, he will certainly welcome a check of this size. But it’s a far cry from a million dollars.

Of course maybe the studio will pick up the option. Maybe they’ll make the movie and the writer will get sole credit. Maybe it will gross hundreds of millions of dollars and he’ll get all his bonuses. (He’ll still pay commissions and taxes on all of that, of course.) Then those beautiful residuals will start to roll in. But he might not want to buy a Ferrari counting on all of that happening.

And of course when you’re starting out you most likely won’t get a million dollar deal, anyway. If you run the same numbers with a $100,000 sale price, the writer keeps $5,145 of the option payment.

Depressed yet? Don’t be. Working screenwriters get paid pretty well. You just have to understand that you are not a corporate employee, you’re a small business. You have to manage your revenue properly. That means understanding contracts and commissions and loan out corporations. (Also, obviously, you shouldn't count on retiring on one script.)

There’s another way the writer might earn money from this sale. Often, especially if they have good representation, the writer will be hired to rewrite their script. Next post I’ll describe how those deals work.

(Note: always consult an attorney before signing a contract for writing services.)

The Hollywood Pitching Bible: A Practical Guide to Pitching Movies and Television is now available on the Nook. And still available at Amazon, iTunes, Kindle and Smashwords.

1 comment:

Kurt Mason said...

Good stuff my friend. Doug, are you a lawyer, or a movie maker just helping others?