There’s a reason why the percent sign (%) is nearly always used when replacing profanity in text with random punctuation (which I’ve learned is called “grawlix” or “profanitype”, who knew?) When something so seemingly simple to understand can lead to as much confusion as percentages do, it seems only fitting to associate it with harsh language. Since we use percentage an awful lot in our industry it pays to really look into what it means when it is used, how it’s used (and misused) by different parties and how to make certain you understand what it means when it is applied to your interests.
What is a percentage?
In simplest terms a percentage is a calculable fraction of a whole. But just because it can be stated simply doesn’t mean it can be as readily understood. How a percentage is calculated, how the fraction is determined and just what whole is to be considered can all be incredibly complex and difficult elements to fathom. If you don’t have a handle on how these elements interact you can be easily overwhelmed or underserved by the “simple” percentage involved.
It’s math. Something over something else. Division. The percent sign itself (%) kind of gives that basic relationship away. The denominator is KEY. An offering of 50% of net profit, poorly defined may yield much less money than 0.1% of gross profit generously defined. And both definitions may lead to the calculations coming up with no money owed to you at all. You need to know how everything is defined before you have a real sense of the potential or actual value of any percentage of anything.
Our industry is rife with uses of percentage. They go by many names and are used in so many areas of compensation calculations. They can be called producer points or shares in profit or revenue. They can be used to determine when bonuses kick in from box office performance or payments are due based on a to-be-determined “final” budget. And they can be compounded upon other percentage calculations, such as when the producer points calculations don’t kick in until the investors share is taken from the gross revenue to return some percentage above (say 120%) their originally invested amount.
To truly understand what the percentage in question really is and how it resolves itself to dollars and cents takes attention to detail and understanding of the minutia of the calculations. This isn’t as daunting as it may seem at first blush but it does require more than blind faith or assumption of meaning. With a little bit of foresight and realistic expectations you can at least get a grasp on what is truly being offered when you are offered a percentage.
When is a percentage calculated?
Invariably, when dealing with percentages the payments are by their very nature deferred. The offer of a percentage is merely setting the calculations that will be used to determine the later payment(s). Occasionally a percentage deal can include an up front payment, like if a Minimum Guarantee (or MG, a term usually found in a distribution deal), is included which allots that no less than the MG as payment for the percentage share bargained for. The MG is usually paid up front and if the earnings equal more than the minimum already paid, the filmmaker is compensated their percentage share.
But for most percentage deals there is a wait before you see a dime from the calculation. If the payment is based on a “final” budget, for example, the wait is at least until pre-production is completed and often not assessed until long after the production has stopped the cameras running and the final costs are assessed. Seeing that film productions can stretch over two years or more before they’re “in the can” the wait for your percentage calculated on final budget can seem interminable.
And some calculations are continuously perpetuated by alterations to the other elements in the algorithm. Here lies the horror stories of big blockbuster hits never turning a “profit” (where the net profit shares would kick in), because the accountants continually add to the ongoing costs charged against the film for the continuing marketing and distribution fees and everything else that accrues and takes away from the gross income. There are other ways of calculating the income and outflow of money a film takes in that might fall another way. But, if a studio is left on its own to determine what exactly is going to be the calculation leading to sharing a percentage of the monies coming in, how often do you think fairness wins the argument?
Some percentages are better than others.
Often, all the calculations of percentage- regardless of what other factors of cost are accounted for getting to profit- have to wait for other percentages to be paid out. For investors, there is usually a guarantee that all monies that can be allocated as income from a film goes back to them prior to sharing with others. A typical investor’s return on investment (ROI) guarantees for investors a certain amount above the initial investment (120% is the norm,) before they have to share any further film income with the producers (typically these “points” are split 50-50 with the investors.) When a producer offers shares in a film as compensation those shares are nearly always only from the producer’s points, so, tons of money has already been pocketed before the “sharing” can even start.
It has become extremely rare, but, if you have the clout at the negotiation table you can ask for First Dollar Gross which is a percentage that comes directly out of the gross revenue prior to (nearly) all other debts or costs against the film. Because of the devastating effect, the practice has against nearly all profit participants in the film, very, very few filmmakers can currently demand such an advantage and always at the deficit of their fellow filmmaker participations.
How (and how often) is a percentage calculated?
You might be thinking why is this section even necessary? Isn’t a percentage calculated by one figure divided by another? But who is in control of those figures, how they are derived and when they are calculated before determining percentages can make a considerable difference to those awaiting their share of the pie.
Typically, those who own the calculators tend to enter the figures in the most favorable fashion for their own benefit. The term “creative accounting” has been coined for the various ways accounting departments tend to come up with calculations where the sharing part of the profit is seldom reached. And they don’t have to be actually “cooking the books” by doing anything illegal while still having the ability to make the numbers come out in a way more advantageous to the company and less to those they have to share with.
For those awaiting their share, strict attention must be paid to the definitions involved. And the fact that there can be multiple definitions of “profit” used in the various contracts connected to a movie can lead to some parties seeing participation while other parties are left out. Definitions are key. Which budget figure is to be used as a basis, which box office figure, etc. are important determinant questions. In your contract terms define, or at least know which costs or debts are to be included or excluded in the tabulations leading to a base figure to determine a percentage. There are no rigidly defined criteria, so the definition used is completely negotiable and can vary considerably, depending on the power of the negotiating parties in the room. My current approach is to try to include a Most Favored Nations type clause for the definition of profit in contracts for my clients so that whatever existing definition of profit in any comparable contract related to the same film that best benefits my client’s participation is taken as the definition to use for my client, just in case.
Also, consider the timing of when calculations take place. A calculation of profit taken just after a large debt comes due will be much lower than one taken at another time. An important check on these calculations is retaining an audit ability to look at the books and how they are processed. Although the costs of such a review can be substantial and cause delay, the ability to call for an audit can hold the other side much more accountable (pun intended) to do things according to contractual obligations.
In addition, pay attention to which moneys go into the calculation – is it just this film or is it a slate of films that all depend on each other? Which studio costs are included? Do they relate directly to the film? Is there a potential for double dipping? (Studio that distributes the film, costs distribution fees it charges itself against the profits of the film.)
Recognize that net profits don’t have to be worthless (define them better) and gross profits aren’t always actually gross enough (again, definitions of what’s left out.) In this instance even more so than all my other column topics, truly, it depends.
Realize that you’re not going to be able to define everything in your favor. Likely you’ll have to settle on a calculation of compromises. But, if you are fully aware of what those compromises are, you are better informed as to just what potential value your percentage truly is.
Why percentages be even an option?
Don’t fail to consider whether gaining a percentage loses you too much in what you give up. The valuation of possible foreseen gain in the future needs to be equal to the risk of getting bupkis and missing out on a surer, though potentially smaller gain now. Percentage is often offered to save up front money. WARNING: There’s not always back end money. Often the attraction of taking a potential percentage compensation instead of a more certain fee structure lies in the alternative values of compensation. You may find value in the relationships being built, or you feel the opportunities being afforded can’t be garnered in another way. Make sure the reason you chose to delay your potential financial rewards are worth the wait and risk.
It is always prudent to beware of offers of a backend percentage from producers you’ve not worked with before or whose actions seem a bit fast and loose. Remember the premise behind The Producers (Mel Brooks’ original 1967 film, then the Broadway Musical, and the other film.) For those that don’t remember, as a money making scheme for themselves the titular producers gave more percentage of profits away to their investors than they ever could receive (anything over 100% - they gave 25,000%) and could only get away with it if they were guaranteed to produce a flop. Unscrupulous people may play on the likelihood of most films never reaching profit to get away with something similar. Some producers are quite willing to give away lots of “points” knowing full well they’ll be impossible to collect.
To summarize, be aware of all the elements going into a percentage offer, including the non-monetary compensation you might garner in the meantime, before accepting such a deal. Anything that isn’t strictly defined in your terms assume to be the least advantageous to you. So make sure everything important is defined in a way you can at least understand and hopefully is to your benefit. Whether the deal is worth taking is a question only you can answer once fully informed. As always, it depends.