M E M O R A N D U M
You requested that I prepare a rough memorandum
to show your prospective investors, to assist you in acquiring funding
for your record label.
A. You gave me the following information:
A1. You are qualified to handle the activities
of selecting artists, session musicians and material, producing masters,
handling artwork and printing, promoting and distributing records.
A2. Your investors are willing to provide
$________ now and $_______________ in six months or the aggregate sum
of $_______ for the first year.
A3. Your investors are willing to accept
an equity position in the record company with half for them and half
A4. Your investors wish to remain 100%
owners in all assets of the company until such time as they have recouped
in full their initial capital contribution(s). This is a standard procedure
with some venture capital investors.
B. You requested information to prepare a
budget for the first fiscal year of operations. My thinking is as follows:
B1 Divide your thinking into two types
of costs-- those which will go on monthly regardless of whether thecompany
issues releases or not, and those expenses that are incurred in the
production, manufacturing, distribution and promotion of the releases.
B2. Your monthly expenses should include:
a. Your salary
b. Your ordinary expenses account
c. Extra expenses road account
e. Telephone (local)
f. Telephone (long distance)
i. Legal Services
j. Office Supplies
k. Demos & recording/video tape
B3. Your release expenses include:
a. Production of Masters (10 sides) $
b. Pressing and shipping 1st pressing
c. Pressing and shipping 2nd pressing
d. Promotional copies and mailing
e. Excise taxes
g. Advertising & Artwork
h. Payment of mechanical licenses
i. Distribution costs
B4. The above is incomplete and the amounts
C. You requested suggestions on how to set
up your business:
C1. I would suggest setting up two business
entities - one for music publishing and the other for the record company.
C2. The Publishing Company should be constantly
acquiring assets in the form of copyrights and songwriters signedexclusively
to your publishing arm and will have relatively few expenses (advances
to songwriters, lead sheets, filing fees, recording, tape duplications,
etc.). This could be initiated asa corporation (probably Chapter sub-S)
or could be a limited partnership although for tax purposes the sub-S
might be more attractive to your investors.
C3. The record company will spend a lot
of money in overhead and record production, promotion, and distribution
andit may never have a hit nor recoup the capital contributions of your
investors or, for that matter your sweat equity. For limited liability
reasons, a corporation is advisable. However, the investors for tax
reasons may prefer a limited partnership. All the parties involved should
consult their accountants for counsel in this matter as the tax codes
change yearly and they would be best qualified to know recent changes
in the tax laws.
C4. Other business, such as a distribution,
promotionor management company may be set up at a later time as the
C5. Any partnership set up will provide
for the division of profits to both you and the investors, repayment
of initial capital loan, and for the sharing in losses for taxation
purposes. Repayment of the initial capital can be in the form of a royalty
paid on each record sold and paid for, or may be dispersed at intervals
out of the company's general fund. There should be no personal liability
for any of the principals beyond the amount they have contributed to
the company. Your salary should be considered an expense of the company
and not a recoupable advance.
C6. The company should have an employee
agreement with you - for possibly three years - with a provision that
if your services are terminated, you will receive half of the remaining
salary for the term of the employment agreement as liquidated damages.
In your capacity as a producer, You may wish to receive a royalty for
each record sold and paid for in addition to your salary. Or, your salary
can be treated as an advance against royalty rates. Royalty computation
should be biannually with the royalties being paid within 60 days of
January 1 and July 1 for the previous six months ending on those dates.
C7. If your record company is incorporated,
try to make certain that your investors purchase several thousand dollars
worth of stock. The ratio of money paid for stock, to money loaned to
the corporation should not be so small as to invite adverse results
in creditor law suits or any adverse ruling from the Internal Revenue
C8. If your investors want their investment
returned before you receive your percentage of the stock, protect yourself
to see that you will receive your stock when it is due you. One way
to accomplish this would be to have each investor purchase his shares
for cash, have the corporation issue to each investor half his shares
on one stock certificate and the other half on another certificate,
have each investor assign his second certificate to you and have all
such certificates placed in escrow with a bank. You will furnish the
bank with instructions to deliver the certificates to you upon a notarized
notification from the corporation that the initial investment has been
recouped in full by the investors and instruct the bank to return all
certificates to their respective investors if no notification has been
received from the corporation in three years.
C9. The word "investment" can
mean the total amount furnished by the investors, or may exclude the
amount paid for stock and include only the amounts loaned the corporation
and furnished to the partnerships. I recommend the second combination.
D. You requested a rough draft for an investment
proposal.This is rough and this should be kept in mind. It can be used
as a basis to begin negotiations but is not the last word in the matter.
D1. Please note that you informed me that
you will have $________ to spend during the next six months, and this
prompted me to try to budget your company to one-sixth of that amount
as your average monthly expenses. I found your monthly overhead to be
in excess of what your present budget reflects. After office expenses,
you will be left with very little for your production budget.
D2. This indicates that you should concentrate
on master production and promotion, and that you should leave the pressing,
financing, and distribution to another record company or distributor
currently set up for national distribution.
D3. The budget covers items such as long
distance phone calls and out of town travel. These are expenses you
should incur to promote masters produced by you, whether such masters
are released by your company or another national sales company or distributor.
Masters leased to another company may not receive sufficient individual
attention from such a company (which may operate on the theory of releasing
many masters in the hope that one out of ten will hit, current "blue
D4. I would suggest that you produce masters
to be released through other national sales companies, when possible
and profitable, and some masters to be released nationally by your own
company. Your releases should be done one at a time - wait until one
record is dead before releasing the next.
D5. This one release at a time method will
give each record its maximum chance for success. Your long distance
phone bill and out of town trips can primarily concentrate on your own
releases; however, you can also push the records released by other companies
which you produced and/or published and possibly expand your company
into record distribution and promotion for third parties..
D6. If you have two non-competing records,
you may wish to split your primary promotion attention. You may save
some shipping and promotional costs by including both masters in the
same promotional and mailing package to radio stations, the media and
other domestic and foreign labels.
D7. Not every song you record must be released.
It is common practice among producers and record companies to record
two to four more songs than are slated for release. Doing this assures
you that only the best recordings are released and if all the recordings
are excellent, you have a head start on the next project with this artist
or backup tracks of previously unreleased material for television and/or
film appearances by the artist.
E. I hope this memorandum will give you and
your investors an idea of where their capital will be used if you have
no income. Assuming there will be income to the company, accounts could
be set up in the following manner:
E1. You may be reimbursed for cost of masters
by national sales agencies. You may receive an advance greater than
your session costs, and further advances as your masters become hit
records, this can recoup or even show a profit prior to the release
of record of production costs.
E2. You might have what other music publishers
consider commercially viable songs in the publishing catalogue of the
business. You may receive advances from other publishers, both here
in the U.S. and abroad who may purchase interests in the copyright.
E3. You may receive advances from foreign
companies wishing to license your masters. This can be on a blanket
basis for an entire area (e.g. Europe, Asia) or on a per market basis
(e.g. France, Germany, etc). This can be a good source of both advances
and royalties although you must bear in mind that an overseas licensing
agreement will net approximately one-half of the royalties you would
earn in the U.S. on your own label.
E4. Although nlikely, you may receive advances
from a performing rights society after a writer in your publishing stable
has established a record of earnings.
E5. You may in the future, dependent on
the success ofyour label's releases, even receive royalties on masters
and songs. On the records your company released, you may even have the
pleasant experience of having area distributors pay you on delivery.
I hope this gives you a starting place from
which to commence your negotiations with your investors. Keep in mind
when negotiating with your investors that although the high returns on
investments for the winners in this industry are incentive to invest,
the large majority of indie record companies are lucky to just stay in
business for five years. This is a high risk investment vehicle and your
prospective investors should be made aware of this. Good Luck.