A Simple Guide to Financing an indie film with Private Equity

Ciao everybody. I wrote this in Plain English to help producers and filmmakers navigate a difficult area of film production.

First, a legal disclaimer:

DISCLAIMER. This is a simple guide to a complicated topic, and it involves state and federal law. This is not legal advice under any circumstances. There are a million different ways to structure the financing of an independent film, this is but one, and a simplified guide at that. These concepts will not work for everyone, nor every film. If you’re going to raise money for a film, you must hire a qualified attorney or you could make huge expensive mistakes.

Still here? Cool, grazie.

Here we go!

Private Equity – In Plain English.

The first time a new producer gets in a discussion about raising money for a movie, the phrase that usually throws him/her out of their game is ‘private equity.’

For whatever reason, most people coming into movie world have no idea what “private equity” means, and if you don’t, it can turn a discussion of financing into a sea of meaningless jibber-jabber.

Simply put, in the world of independent film, “private equity” means an investment in your movie. Aka somebody gives you money. There can be other contributions besides money, but let’s keep it simple for now. Money.

So, if Uncle Bob invests $10,000 in your movie, Uncle Bob becomes an equity investor. In exchange, Uncle Bob will get paid back (maybe), he’ll probably get a screen credit, executive producer or whatever, and one form or another of “contingent compensation” from the profits of your movie, if any. More on that in a second.

My point is, if you’re raising money for a film, you’re typically searching for equity investors. Uncle Bob, get out the checkbook.

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How NOT to raise money.

One way “not” to raise money for your film, is to run around with a script and attachment letters and start taking money from random people. Worse yet, take out newspaper ads for investors.

This can all be done, but the potential downside of a mistake is jail. Read that 2x. The penalties for violating securities laws when raising money for a movie can be criminal, as well as civil.

Accordingly, as fun and exciting as it may be to treat movie money like the wild west, it is not advisable. You can find money for a film in a million different ways and places. But lawyers can only participate in film financing situations that comply with state and federal laws.

And so should you.

Raise the Money.

If you want to raise money for your movie in the United States via private equity investors, and you have competent legal counsel, you’re probably going to assemble documentation that is commonly called a “private placement memorandum.”

Aka, a PPM. Remember the acronym, PPM.

A PPM is simply a collection of documentation that explains your movie, your production team, and the film industry (in general), to your investors.

If properly drafted, a PPM will be customized to your movie and will give your investors confidence and a solid understanding of your project and the financial structure. They will NOT get a guarantee they will make money – there are many great things about Hollywood, but perfect financial predictability for a specific film that is not shot yet, isn’t one of them. But – your investors will have confidence that your project is built to succeed, and the deal terms are fair, clear and transparent.

A PPM includes items such as state and federal required investor notices, investment risk factors, professional bios of key producers and production team, cast attachments, a production timeline, a script synopsis, chain of title analysis, a director’s statement, description and updated description of the film business, offering information, use of proceeds, accounting information and most importantly, a clear financial map.

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Typically, when raising money through a PPM, I advise producers to structure it as a so-called mini-maxi.

First, we devise your minimum budget, aka is the lowest budget you know with 100% certainty that you can finish and deliver your film to a distributor.

Second, we arrive at a maximum budget. What is the “most” money that you want to make your movie? And the answer to that question is NOT a trillion.

You specify a maximum budget for many reasons, but #1, is that it protects the investors from having their investment diluted.

Making the example ridiculous, a $100,000 investment in a $100,000 film that does great in the box office, will result in investor happiness.

A $100,000 investment in a $100,000 film that accidentally becomes a project with a $10 million budget because a studio falls in love with it, will not result in original investor happiness, because his/her slice of the pie is suddenly tiny.

Maybe their pie disappears …. because no one has ever recouped $10 million from a black and white seven-hour long animated art film that stars a depressed pencil who learns to speak Apache.

Or maybe it suddenly becomes an award-winning six-episode season on Netflix or Amazon.

Which is genius.

Ahhh, but I digress. Anyway —

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Let’s Say…

Let’s assume you calculated the minimum/maximum budget, and you legally and properly launched a PPM. Now, as you raise funds for your film, the money goes into an escrow account.

This money in escrow can NOT be touched unless and until you raise the specified minimum budget.

Once you raise the minimum budget, green light! You start spending the money in accordance with the minimum budget, because you know with 100% certainty you can finish the film. You can keep trying to raise money to hit the max budget, but you don’t have to.

So, let’s say your film has a minimum budget of $800,000, and a maximum of $1.5 million. And let’s say each investor will invest $100,000. Thus, you need 8 investors to sign a PPM and invest before you are allowed to touch the money. If you don’t hit $800k, the money gets returned to the investors.

Now, you may have a development fund or other ways to finance development until green light.

But PPM money can not be touched under any circumstances, unless and until you hit the minimum budget. This assures investor #1, for example, that you’re not going to spend all of the money on “location scouting” in Italy, and then have no money or plan to make the film. If you spend their money, they get a movie.

Quick Caveat.

There may also be a completion bond in play, aka an insurance policy that ensures you will finish your movie, including all sorts of ugly legal mechanisms to ensure it gets done, one way or another. The contents of a completion bond are beyond the scope of this article.

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$$$ The Waterfall $$$$

Let’s assume you successfully raised the money, and your PPM documentation is compliant with all applicable state and federal laws.

Rock-n-Roll.

[insert your successful shoot and post-production here]

Next, “how” the money will return to you after the film is sold, licensed, put in theaters, on TV etc, is commonly called a financial waterfall in Hollywood. Or more simply, the “waterfall.”

To keep this simple, let’s assume there are no bank loans, and your movie is fully financed by private equity. Uncle Bob and his pals went nuts. Grazie, Uncle Bob.

Step 1 – Investor gets paid back, plus a Premium

The first step of the equity waterfall, is a basic principle.

Your investors get paid back.

They also get what you want to call “interest,” but what is typically called a “premium” on their investment.

In a normal low risk real world venture, investors typically get a low but predictable rate of return.

In indie film, where nothing concerning any given film is predictable and risk is part of the game, investors typically get a high rate of return. This can be as low as 5-10%, or as high as 35% (ouch).

The rationale behind offering a huge return, is to reward the fact that an investment in an independent film is risky.

In fact, the only generally accepted manner in which to make investing in film a somewhat predictable commercial enterprise, is to invest in slate. Then, the one film out of 12 (or worse) that makes a profit, will pay for the 11 flops. These metrics are the primary reason why movie studios do not fail. When a movie on a slate hits, it hits big all over the world, the adjoining flops are a tax write off.

Step 2 – Deferments. Generally, a Bad Idea.

Simply put, deferments are a tool for a producer to get a movie into production, with less money than he/she actually needs.

The way it works is, is simple.

For example, if Tom the Actor gets $1 million fee per film, but you only have $500,000 to hire him, you pay Tom a $500k actor fee, then commit to pay another $500k (or more) as a “deferment.”

On its face, this seems like a great idea, because it doesn’t hurt anybody, the deferment is “free,” and at the end of the day, investors get paid back before anyone gets paid a deferment anyway.

Not so fast, cats.

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Two Problems.

Problem #1, as you will see next, Step #3 in the financial waterfall are “net profits.”

By adding deferments, everyone’s net profits in Step #3 are diluted and pushed back in time, if not killed off completely in dramatic fashion.

Problem #2, a lazy or desperate producer may hand out deferments on a movie to everybody and their brother, and inadvertently kill everyone’s net profits in the process. Including his/her/their own.

Accordingly, my preferred financial structure, is to eliminate deferments entirely. Do not use. Kick them out. Bye. Sayonara. Ciao.

Getting rid of deferments enables you to confidently make legal representations to your investors and production team, as you will see below, which will make everyone and their brother very happy.

AND — as a bonus — your financial waterfall becomes transparent, simple, and easy to explain.

On the downside.

You have to make your movie for the money you actually have.

Which isn’t really a downside.

In short, eliminating financial deferments on a movie transforms net profits from imaginary carrots to a potentially valuable financial interest.

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Step 3 – Net Profits

The third and final step in the financial waterfall are what I will call net profits for our purposes here.

Simply put, at this level, the money gets split into half.

One half (50%) of the “net profits” go to your investors, split pro rata, in relation to their investment. [sometimes, the investor side gets more than 50%]

One half (50%) of all net profits goes to your producers.

KEP CONCEPT #1 – All net profits (aka “points”) that go to actors, writers, cinematographers etc., come from the producer’s share. Thus, Producers are motivated NOT to give out net profits because they keep what remains from that 50% for themselves.

KEY CONCEPT #2 – A great reason to give someone net profits is to keep them engaged throughout the life span of the film. Even if their work is complete, it will always be in their best interest for your movie to succeed. Think about that.

Key Concept – Naming Contingent Compensation.

There are many different ways to name and/or define contingent compensation on a movie. For purposes of this article, I keep it simple, net profits. But these “points” can also be called adjusted gross profits, gross profits, producer’s points, and all sorts of wacky names.

Furthermore, the definition of net profits can be a short as one sentence, or 10 pages or more, depending on the studio and the contract. There can be multiple profit definitions. If you’re on a film with Spielberg, the definition of contingent compensation in your contract is probably going to differ from his, no?

Point of fact, it is possible that everyone on a film may have a different definition of contingent compensation in their contract. Which may or may not cause at least one accountant to go insane.

It is a reasonable conclusion from the preceding sentence that the film industry is insane, and film accountants and lawyers are not from this planet. However, if you remember one simple concept, it will help you navigate Hollywood —

In Hollywood … all financial definitions, all deferments, all contingent compensation of every kind in the history of movies… only means what your contract says it means.

That’s important.

Unless there is an underlying collective bargaining agreement or other controlling document that defines the terms, a contract stands on its own. And in terms of Hollywood contingent compensation, the contract states the rules of the game, so to speak, nothing else. SAG-AFTRA isn’t going to define your net profits.

FACT – When someone offers you 5% net profits on a movie, you have no idea what the offer is, unless and until you can review at the contact definitions.

Ponder this – a good attorney can draft a contract that will give you .01% net profits and make you insanely rich if the film hits. On the other hand, that attorney can draft a contract that will give you 25% so-called ‘gross’ profits, but ensure you’ll never see a dime, even if the film makes $100 million at the box office.

The point is not to suggest renegade contract drafting, but rather that you can’t know what the contingent compensation numbers mean until and unless a lawyer or other qualified professional takes a good look at your contract and the definitions.

AKA, “nobody knows anything” … until you look at the contract.

Don’t get fooled by Hollywood smoke and mirrors. Contingent compensation numbers don’t mean anything out of context of a contract, nor do the terms used to describe your contingent compensation. In Hollywood, the contract terms define and determine everything. Forget this rule at your peril.

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WATERFALL – Quick Review.

STEP ONE – Investors get paid back + a Premium

STEP TWO – PROFIT SPLIT.
Investors get 50% of net profits; Producers get 50%

If you keep the structure, you can tell investors: (A) You’ll get paid back from dollar one, plus a premium; and (B) the calculation of your profit is the same as every other person on the film, including every producer and the director

Now, there is more to the presentation, of course. But, if you do this correctly, your investors will feel secure knowing your waterfall is transparent and simple, and that mysterious Hollywood bullshit accounting mechanisms like deferments don’t exist on your movie.

And Finally.

Please remember, cats, this is not legal advice. This is a simple article to explain basic concepts, and my approach to independent film financing. There are many concepts and facets of the discussion that are not present here.

Thanks for reading – Ciao!

Lee Rudnicki, Esq.
drumlaw80.com
 
An adjacent topic I think a lot of indie filmmakers would be interested in is how to stage up from zero. There is certainly a class divide where people are locked behind financial barriers that prevent them from gaining information, experience, or context, and in many cases creatives are hard locked at financial levels so dizzyingly low that even some of the basic steps, such as "hire a good attorney to review your contracts" are beyond reach, insuring that they are taken advantage of, even in the best case scenario where a run is greenlighted, which it never is for people from lower income areas, represented by this map where the white areas highlight people that don't have 40,000 dollars in disposable income to hire counsel and fly to meetings.

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I'd reference the Blair Witch project, which has become mythological in indie circles as the single greatest triumph on record for a Hollywood outsider. The director of the biggest success in microbudget history now shoots black and white films of his friends standing at a local park and tries to monetize them for enough money to buy shoes. Kevin smith fought the good fight for many years, and had some success, but he's mostly paying bills by signing autographs and appearing at conventions. In fact, Hollywood is so dedicated to shorting everyone via accounting that they famously took almost every cent of the profits from Harry Potter and the order of the Phoenix, a film that made nearly 1 billion dollars, with no money remaining for the cast and crew after industry accounting, which was just a maze of vertical integration handouts. Even in your writeup, it seems to follow a trickledown economics pattern where one person (the producer) is in a position to essentially deny compensation to everyone who actually worked on the film, with a built in financial motivation to do so. If the wealthiest people in the world will casually stoop to cheating even their respected peers who brought 1 billion dollars in income to the table, what expectations can people without the means to defend themselves have?


For me, and many others, we understand things like net profits vanishing in accounting, or how to structure a deal, but what we don't understand how to raise money to pay to raise money. For some generations, a 9 to 5 job resulted in 2-8 million in retirement savings, so it became possible to do what I'm sure you're thinking of as basic things, hire an attorney, shoot a pilot, network with potential angel investors. At present, there are people that passed the bar exam living paycheck to paycheck. We saw a story earlier this year, where a coder with 54 million dollars in savings got a film deal. And why not? His series, "what if I went to the beach and got drunk" was clearly a masterpiece of dramatic design with a scalable concept of universal relevance. My perception is that if any of us here wrote a screenplay on par with "Papillion" we would be ignored outright. It seems though that serious filmmakers without financing BEFORE they start looking for seed capitol are unable to proceed. I've personally received a handful of offers to pitch a property to investors, only to be asked to fly to another country and stay in a hotel for days for the meeting. When I reveal that I don't have enough money to travel internationally to find out if there's a possibility of getting a paycheck 2 years from now, they hang up instantly, disgusted to find themselves in the presence of someone without huge amounts of disposable income.

I've worked on a lot of films in the 150k dollar range, some 250, and it's really not possible for those productions to retain counsel for 30k over a 2 year period, or fly to Tokyo and drop 7 grand over a weekend to discuss "possibilities"

In short, where is the bottom rung of the ladder? Some of us are quite competent in various areas, but cannot network effectively until after we start receiving profits from deals we can't get until we're able to network. Is there actually any legitimate hope in a world where the Harry Potter or Rhythm and Hues situations took place? Rich people are winning an Oscar and then going broke because they were so badly mistreated by the system. Benedict Cumberbatch was in the news complaining about how there was no room left for little guys like him to make a film in the era of the Disney monopoly.
 
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An adjacent topic I think a lot of indie filmmakers would be interested in is how to stage up from zero. There is certainly a class divide where people are locked behind financial barriers that prevent them from gaining information, experience, or context, and in many cases creatives are hard locked at financial levels so dizzyingly low that even some of the basic steps, such as "hire a good attorney to review your contracts" are beyond reach, insuring that they are taken advantage of, even in the best case scenario where a run is greenlighted, which it never is for people from lower income areas, represented by this map where the white areas highlight people that don't have 40,000 dollars in disposable income to hire counsel and fly to meetings.

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I'd reference the Blair Witch project, which has become mythological in indie circles as the single greatest triumph on record for a Hollywood outsider. The director of the biggest success in microbudget history now shoots black and white films of his friends standing at a local park and tries to monetize them for enough money to buy shoes. Kevin smith fought the good fight for many years, and had some success, but he's mostly paying bills by signing autographs and appearing at conventions. In fact, Hollywood is so dedicated to shorting everyone via accounting that they famously took almost every cent of the profits from Harry Potter and the order of the Phoenix, a film that made nearly 1 billion dollars, with no money remaining for the cast and crew after industry accounting, which was just a maze of vertical integration handouts. Even in your writeup, it seems to follow a trickledown economics pattern where one person (the producer) is in a position to essentially deny compensation to everyone who actually worked on the film, with a built in financial motivation to do so. If the wealthiest people in the world will casually stoop to cheating even their respected peers who brought 1 billion dollars in income to the table, what expectations can people without the means to defend themselves have?


For me, and many others, we understand things like net profits vanishing in accounting, or how to structure a deal, but what we don't understand how to raise money to pay to raise money. For some generations, a 9 to 5 job resulted in 2-8 million in retirement savings, so it became possible to do what I'm sure you're thinking of as basic things, hire an attorney, shoot a pilot, network with potential angel investors. At present, there are people that passed the bar exam living paycheck to paycheck. We saw a story earlier this year, where a coder with 54 million dollars in savings got a film deal. And why not? His series, "what if I went to the beach and got drunk" was clearly a masterpiece of dramatic design with a scalable concept of universal relevance. My perception is that if any of us here wrote a screenplay on par with "Papillion" we would be ignored outright. It seems though that serious filmmakers without financing BEFORE they start looking for seed capitol are unable to proceed. I've personally received a handful of offers to pitch a property to investors, only to be asked to fly to another country and stay in a hotel for days for the meeting. When I reveal that I don't have enough money to travel internationally to find out if there's a possibility of getting a paycheck 2 years from now, they hang up instantly, disgusted to find themselves in the presence of someone without huge amounts of disposable income.

I've worked on a lot of films in the 150k dollar range, some 250, and it's really not possible for those productions to retain counsel for 30k over a 2 year period, or fly to Tokyo and drop 7 grand over a weekend to discuss "possibilities"

In short, where is the bottom rung of the ladder? Some of us are quite competent in various areas, but cannot network effectively until after we start receiving profits from deals we can't get until we're able to network. Is there actually any legitimate hope in a world where the Harry Potter or Rhythm and Hues situations took place? Rich people are winning an Oscar and then going broke because they were so badly mistreated by the system. Benedict Cumberbatch was in the news complaining about how there was no room left for little guys like him to make a film in the era of the Disney monopoly.

Wow, there's a lot here, some great thoughts. Not sure I can address them all, so l will just speak about legal counsel.

As I said in my article, it is a mistake to proceed into film production without well-drafted contracts, for many reasons. But, you shouldn't assume that every lawyer will require $30K or more to work on a film. That's not the case.

First, there are resources and organizations like California Lawyers for the Arts, that cater to new filmmakers that have little to no financial resources. I'm a panel attorney for CLA, and although time constraints and the economic realities do not allow me to take on a ton of pro bono or super-low fee clients, I do so from time to time, because I enjoy helping new filmmakers.

I came into the film business with no clients, no knowledge, no money, no job and no one helping me, and I took on my first SAG-ULTRA law budget film for a total legal fee of $ 500. True story.

In hindsight, I learned so much on that film that if I had to pay a $10K for the opportunity, it would have been worth it. When all was said and done, the film was sold to Lions Gate. Trying to become an entertainment lawyer is as difficult as becoming an actor -- you might be pleasantly surprised by reaching out to different lawyers.

Second idea, it is sometimes possible to pay for a good template agreement from an experienced lawyer for your cast (or crew), for example, and use that contract for everyone. The trick is -- you have to make it clear to your cast and/or crew there will be "zero" revisions or negotiations on the documents, which should be a locked PDF. If an actor wants to "redline" the deal, get another actor. This approach can work for short films (easily), and ultra-low (possible) -- and the way you work with counsel is to promise the lawyer (via a written agreement) that you will not use the agreement for other projects nor provide it to anyone else. Other budget levels, this approach will not work easily, but you'll have money for counsel at those budget levels, by definition.

In terms of drafting a PPM to raise money for a film, that involves a ton of work and potential legal liability, so unless your attorney is a producer as well, or your friend, I don't think this can be done without financial resources.

As I said in my article, the penalties for securities fraud are criminal, so you should not venture into raising money for a film without counsel. Worst case scenario, go into crowd-funding -- which is not so fun, at times, but you can raise money for a short film or ultra low budget feature.

BTW, the Blair Witch project is a legend -- but generally speaking, people are not aware how much money went into P&A for the film, and I doubt the total budget quoted by many is accurate. It takes a ton of money to release a film in the theaters, a ton of money just for a film to be "delivered" in accordance with most pro distribution agreements. In a certain sense, the Blair Witch legend is just that -- a legend. Yet people remain convinced that you can theatrically release a movie for 15K or whatever. Not so.

Sorry if I did not fully answer your questions -- but long story short, there are creative ways and resources to find counsel for a film, with or without a ton of money. If you don't have a lot of money, don't try to engage with a huge Hollywood law firm, start at CLA, or find a small firm or sole practitioner who loves film and the experience of working in film. It takes time and some effort, like anything else, but it can be done. If you cannot afford other elements of filmmaking -- start making movies with your iPhone, and get noticed that way, go up step by step.

Whatever you do -- understand that the only person's permission that you need to make movies ... is your own.


Lee
 
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Whatever you do -- understand that the only person's permission that you need to make movies ... is your own.
Yes. The film is made. Thanks to the help of some well wishers and a chunk of your savings, you are solvent. It's your film. Anybody who worked on the film did it for almost nothing -and that's what they got; almost nothing. The deal is done. Everyone has gone home.

Lee,
Something that I never find anyone talking about is the option to sell the film outright. Sign the copyright over to a 3rd party. Does this option even exist? Is it a risky proposition? From what I've seen over the past 22 years, not only would it not be risking but it could be your best bet to, at least, break even. What do you think?

NOTE: The interesting thing about INDIEtalk is that there are people here planning to make feature films with budgets ranging from $5,000 up. My question is for films in the $20,000 to $50,000 spectrum.
 
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Yes. The film is made. Thanks to the help of some well wishers and a chunk of your savings, you are solvent. It's your film. Anybody who worked on the film did it for almost nothing -and that's what they got; almost nothing. The deal is done. Everyone has gone home.

Lee,
Something that I never find anyone talking about is the option to sell the film outright. Sign the copyright over to a 3rd party. Does this option even exist? Is it a risky proposition? From what I've seen over the past 22 years, not only would it not be risking but it could be your best bet to, at least, break even. What do you think?

NOTE: The interesting thing about INDIEtalk is that there are people here planning to make feature films with budgets ranging from $5,000 up. My question is for films in the $20,000 to $50,000 spectrum.

Hi James - The problem with selling a film in the $20-50K range is that -- barring a huge festival win -- a sales agent or distributor is likely going to value your film based upon on the name actor(s) in the film. And if you've made a film for less than $50K, you probably don't have any actors that can significantly raise the value of your movie (in their eyes).

One way to at least partially around this is to take a large chunk of the budget (i.e., $10K) and dedicate it towards getting a known actor in your film, even for one day of shooting. I once helped produce a feature with a total budget of $50K, and that's exactly what we did, and we did sell the film. It sounds crazy to pay an actor $10K for one day on such a low budget project, but it can make the difference between getting a film into distribution, or not.

Making your whole budget back from a sales is another story, an art not a science, and a very difficult endeavor, at best in the indie world -- but it can be done, especially with a significant festival win. Without a festival win and without name cast -- it's very difficult. Then you have to go into social media mode x 1,000 and try to build an audience.

And keep in mind -- there are a million different ways to approach producing and selling a film, and no one has all of the right answers about everything. I certainly don't ... but I hope these thoughts are helpful at least a bit.
 
Great info. Very informative. Thanks!
Now all I have to do is figure out how to find equity investors...

And THAT is the game.

I can not tell you how to get equity investors, the answer is different for every person, and every situation.

But I can tell you how "not" to get equity investors, how to fail -- desperation. Investors run away from desperate filmmakers, 100% of the time. Financiers only follow success, confidence and passion -- or the illusion thereof.
 
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