Music Contracts

With all of the different record companies that are out there today you will notice that there are also hundreds of different contracts and contract styles. Each company, whether it's Warner or some small independent label, will have a contract for you to sign and most will have certain parts to it, but not all will be worded the same. Also some may have added perks or requirements that others may not. So be ready for pretty much anything, and be sure you understand what you are signing.

Reading and understanding the contract are two completely different things though. If you sit down and simply try to read through the words on the page you will discover that this wasn't written by normal people with normal English and grammar. Sentences start to become full paragraphs and commas and semi-colons become few and far between. On top of all of that, sentence start referring back to other sentences in the contract using a combination of numbers and letters (like: 1(A)3(c)(ii)) and before you know it you are just plowing through words that mean nothing to you. At this point you will probably realize why so many other bands and songwriters have opted for an entertainment attorney. This person will be able to read what exactly the contract is saying and explain it to you, so you can fully understand what you are signing.

Normally before the band sits down with the company to sign a contract, they have already laid some of the groundwork. Things like how much they will be paid per album sold, how many albums they must produce and if there will be any money paid up front are all things that are normally things decided before hand. The reason for this is these are the terms that companies use to get the bands into the signing room. The perks will cause the band to be interested, that being said, be sure the contract includes the terms that you had previously agreed upon.

Exclusivity

Every contract that any record company will have you sign will be an exclusive contract. This means you will work for no one else but them. You can't sell your songs to someone else, or create an album for another company, you committed to the one company for whatever the term of the contract is. These terms can be a year or many years, it depends a lot of the band and also of the company. If they feel the band will be very successful they generally will try and sign you longer. Doing this ensures the company that with all of the work they are putting into your band, they will eventually reap the benefits of your band at their peak success. Normally there will also be an album amount in there. It could say something about signing you for seven albums. This does not mean that they are going to release seven different albums for you and your band. Generally what the company will do is release one album, see how it goes and then make a decision from there. If it does well, then they will release others, but they are not required to release a certain amount of albums for you. If your album does poorly, they probably won't release anything else and will drop you as soon as they legally can. Another term you will probably see on the contract is the territory. This simply means the area in which your contract is good for. Generally the territory for your contract will be world-wide. Basically saying that record company has control over your music everywhere, no matter what country you spread to.

If you're like most musicians, your band simply wants to make good music and that's what you are about. When you hit the contract and record company stage, it's about money. It doesn't matter how good or bad your music is. If it sells and makes money you stay, if not you don't. This is the part of the music industry that makes it a business. While you are in the business of making music, it's all about making money.

Terms

Because making money is what this company is all about, the financial terms normally dominates the contract. This means that over fifteen pages could simply be setting up the amount of money that the band will get, how much the company will get and how much the company will put in. The majority of this section will be in discussing points. These points are basically the percentage that the band will receive as their royalty rate. It generally ranges from ten to fifteen percent with larger companies and nine to twelve for a smaller record company.

This royalty rate is just an easy way of saying the percentage of each full priced album sale that the band will receive. Again, nine to fifteen percent is a normal royalty rate and it means that you will get that percentage of the retail price of the album each time it sells. The royalty rate isn't that cut and dry however. The contract will probably state that this only applies when the album sells for retail. Places like Sam Goody and other music stores will sell at retail, but what about the other places? This will also be listed in your terms. You will often only get a portion (about sixty to eighty percent of your normal royalty) for albums sold overseas and albums that are sold at a discount store. You will also not get a full royalty if the album sells at a record store, which normally sells at a lower rate and also if it sell online. Each time a record is sold below the normal retail cost, it cuts into your royalty.

These companies will do all they can to make their royalty rates appealing to the artists. They often will offer a huge royalty rate, but there are many other things that will come out of this money other than simple selling method and price. Any CD that is simply given away as a promotion, you will get nothing for, which may seem obvious, but worth pointing out. Also packaging becomes a huge issue. Many record companies will expect the band to pay for the packaging and the taping of the album. This will be taken out of your royalty rate and can be up to thirty percent of it. That means if you are receiving a twelve percent royalty rate and get a twenty-five percent packaging fee, you are only making nine percent now. On top of all of those deductions, you still have to pay your producer. Generally the record company won't pay this and assume that your royalty pay is an “all-in” pay, both for your band and your producer. After the producer takes his/her average three points, you will be left with about six percent of your original twelve. On average, after all of the deductions and payments that need to be made, a band will make about one dollar per album sold at retail through normal channels, and even less than that when sold in other fashion. Assuming the band is four people, each of them is only making twenty-five cents per album. Because of all of these rules and conditions you can see why the financial terms portion of the contract can be a huge part. Especially when they need to start addressing every possible way your album or record can be sold and determine royalties for each method.

An important part of any record contract that many bands seem to overlook or be surprised about is the fact it needs to be repaid. Recoupe is basically a big word for pay back. Essentially the record company puts tons of money into the band for any advances, studio time, promotional attempts and anything else the company did to help out the band before they were anything big. All of this money needs to be paid back. So, let's say the company fronted $200,000 for studio time and advances and everything else. That means the band's royalty pay will actually be withheld until that money is made back by the record company. If an album does really well, then the band will still make quite a bit off of it, but if it barely makes enough the cover the “loan,” then they may not make anything at all. The first royalty check will be sent out after the debt is paid off. However, let's assume the album tanks, and doesn't make even enough to recoup the loan the record company put out, the band pays nothing. So in the end they won't be paying back anything out of their own money, just postponing the money they will be making.

This recoupment phrase should be looked at carefully because it can encompass a whole lot more than simple CD sales. While in most cases the band will be able to make money on their publishing rights while waiting for their royalty pay to come though, the contract may say otherwise. There are some companies (normally smaller, independent companies) that will include any and all money the band makes in their recoupment process, called cross-collateralization. Basically the band will receive no money at all until the loan is recouped and the company has regained its loses. The good part about this type of contract is you won't have to sell nearly as many albums before you start getting royalty checks. The downside is, however, you will get absolutely no money for anything that you do as a band, until you've paid the company back.

Advances

Advances will certainly be talked about in a bands meetings and contracts as well. These used to be more of a signing bonus for a band. Basically the record company would simply write them a check as sort of a “thank you” for choosing their company and also an incentive to join them. The problem with this was, many band would then go way over budget when recording their songs and albums. Of course record companies were upset about this, so they developed a new system of doing things. Now, they will hand the band a check for recording, sort of a budget, but will have their bonus added to it. That way if the band when over budget, it cut into their earnings rather than the companies. It also ended up being a huge perk for the band to keep things under control and efficient in the recording studio.

Deciding on how much of an advancement you and your band would like can be tricky, but there are some things that you need to keep in mind while you are discussing it. Remember, this advance is not for you to keep forever. It will be part of the loan that you are taking out from the the company and will have to be recouped with your royalties later on. This means that if the album doesn't meet expectations and you've taken a large advance, the record company may be quicker to drop you because they lost a lot of money on you. But also, you need money to live until your royalties and publishing checks come in. It is definitely a balance and the right amount will depend on both the band and also the company you are working with. Often times a smaller, independent company won't be able to offer a huge advance, while the larger companies will use it as an incentive to join them.

In short, your contract with your record company can be huge, and can also contain tons of very important information for both you and your band to know. The problem is it can also be “encoded” in “lawyer talk” and is very advisable to find an attorney to help you look it over. Again, you will want to be sure that you understand what you are about to sign. As trustworthy as many companies are, you won't want to trust what they say, unless it is in the contract. Remember, this is a business and the spoken word is nothing compared to the written word in the world of business.