Tuesday, July 17, 2012

Understanding advances and royalties clauses, and two things to think about when deciding to take them

Getting paid is great, but getting paid over and over is even better. Or is it? Payments over time are a bit more complex, sometimes a lot more, than a flat fee. But at the end of the day they break down into two buckets:
  • Royalties
  • Advances on the royalties
You might see a contract say that you'll get $1,500 advance on signing against 10% net royalties. Let's use that as an example. Here's what that means:
  1. On the day you sign the contract, your publisher/studio/whatever will give you a check for $1,500. You can cash that, it's yours. But...
  2. Effectively, you've borrowed money from yourself. That $1,500 will be paid back from your royalties. If your book (for example) wholesales for $10, let's assume there are no deductions (which is a HUGE assumption and I'll come back to that), then you're making $1.50 per unit sold. So you don't get paid until you've sold at least 1,000 units ($1.50 x 1,000 units = $1,500).
  3. At unit 1,001, you start getting $1.50 per unit sold.

If you're reading closely you'll see that, until the royalties start getting paid, your advance is functionally like a flat-fee deal: you worked and you got paid money for it. This is certainly how some publishers and studios treat it. But don't fall for that old banana in the tailpipe trick. The suits never overpay: if they offer you royalties then they think your book will outsell the advance.

It's also important to remember that you aren't paid on the retail price at a bookstore, you're paid on the wholesale price. Bookstores buy books on a discount from the retail price: usually around 50% of retail, but sometimes 60% or even 70%. So in the example above I'm dealing with a book that sells for around $20 retail. If your book retails for $10, then your royalty is being calculated against a wholesale of around $5.

As a creator if you're offered an royalties deal you should always think about at least the following:
  • What deductions are they trying to take before they start paying you? Are they charging interest or other fees? If you're negotiating a contract you need to pay close attention and think about whether the charges seem fair. And even in non-negotiated deals like the Kindle and Nook contracts, you should pay attention to these fees when doing your math on how much money you'll make.
  • Do the math like I did above and think of how many copies you think you'll actually sell. Remember: you ordinarily don't have to pay back an advance. So if you think your book will sell 20,000 copies and someone offers you an advance or even a flat fee that's equal to 40,000 copies, you may be getting a great deal.
You'll may think you'll never regret getting a royalties deal, but if the publisher or studio takes a lot of deductions then "net profits" risks meaning "no profits". In a future post I'll explain why and some things you can do about it.

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