Wednesday, September 5, 2012

Avoiding option clauses and cross-collateralization by using LLCs

A short post today, but hopefully a helpful one.

I've recently seen people complaining of two standard problems with traditional publishing contracts:
  • Option clauses: where publishers require you to give them an option on your next book.
  • Cross-collateralization: where publishers won't pay you royalties on your first book until you've paid back the advance on your second.
It seems to me that there's a very easy way around each of these problems.

Create a separate LLC to hold the rights to each of your books.

Here's what I'm talking about:
  • You write a book called "My First Book". Rather than publishing it under your own name, you assign the rights to an LLC called "My First Book LLC". When you submit the rights to "My First Book" for publication, it's the LLC that signs the deal.
  • You decide to write another book called "Holy Crap, I'm Writing Another Book". You create a second LLC called "Holy Crap, I'm Writing Another Book LLC" and assign the rights to the second book to the second LLC.
This might not work well for a true sequel for various reasons relating to the law on derivative works. But if you're dealing with a completely new title then there's no reason the two books should be treated as though they are connected in any way. They are owned by two completely different "people": the two LLCs are completely different entities at law even though you own both of them. (After all, you can own shares in Apple and Google without those two companies being the same thing.)

This is the way movie studios work by the way. Pretty much every movie that you've ever seen is actually created by a separate company that exists only for the purpose of creating that specific movie. They do this for all sorts of reasons: keeping the accounting clear, making sure that they don't violate the antitrust judgments from the 1950s, concealing the actual identity of the entity with which people are signing releases, and hundreds of others. So it's not like this is something a major entertainment conglomerate has never heard of, and so they can't really complain if you use it to your benefit.

This trick may not work for you for various reasons: your publisher may refuse to do a deal with an LLC, they may put a clause in there where you've agreed they can treat all your LLCs as one entity, it may be too complex to do this for accounting reasons, etc. If you're going to try it, it's absolutely imperative that you hire a lawyer to tell you whether it will work in your circumstances and with your contracts. (This is a good opportunity for me to point your attention to those weasel words in the sidebar.)

But when I was reading the complaints, I couldn't think of why people don't do this more often.


  1. I like it. I'm sure the publisher will flail their arms in frantic gestures and complain how this isn't kosher (to them) but I will definitely keep this in mind. Thanks!

    1. They'll definitely hate it. But if you can get it in the contract then they'll have absolutely no recourse.

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Thanks for commenting. Posts and comments aren't legal advice; requests for legal advice in the comment probably won't get answered. Sorry to have to do this but someone someday is going to make me glad I did...