In our previous chapter we highlighted the two common royalty calculation styles in a record label deal. In this chapter we will discuss the profit share style deal. We will be diving deeper into the royalty style deal in our next chapter.
A profit share deal, sometimes also referred to as a joint venture, is as the name suggests a deal between two or more parties who share the profit of a project. A common split of the profit is an equal 50/50 split between the label and artist, but a higher split may be agreed in favour of either party. The label will traditionally cover all or most costs upfront. The concept of a profit share arrangement means these costs will be recouped out of all income generated and not just the artist’s share, which is a favourable position for the artist to be in. In other words, it means the artist will start earning a royalty as soon as the project becomes profitable.
Also advances can be offered to an artist in a profit share agreement. This advance is generally fully recoupable against the artist’s share in the profit.
Let’s imagine we enter an agreement with our artist, The Cricket Bats, for their next EP which outlines a 50/50 profit share deal. Additionally, we have agreed an advance of £10,000 payable upfront and recoupable from the artist’s share in the profit. We report to our artist half-yearly with a three month accounting delay.
In the first six months in 2021 we made the outlined upfront costs and the EP has earned the below revenue.
To calculate our artist’s balance, we take the sum of all sales and all costs. Altogether, our EP has earned £5,150 and we covered £10,500 in upfront costs. This means our project is currently losing £5,350. We could say the artist’s share of this loss is half of this, so £2,675. Additionally, we still have the £10,000 advance outstanding to be recouped from the artist’s share in the profit.
As per our agreement, we need to report an update to our artist by the end of September 2021. Below you can find an example of a statement that could have been reported to The Cricket Bats. To be transparent towards the artist, we would also provide a spreadsheet that outlines the detail of every single physical or digital sale and every single cost that the label has made upfront.
Now let’s say in the second half of 2021 we made the outlined costs and earned the outlined revenue.
Remember the artist had a total participation on the loss of -£2,675. This half-year, if we take the sum of the sales and costs, we find a profit of £26,425 to be split 50/50 with the artist, equalling in an artist share of the profit of £13,212.5. If we take the sum of the artist’s opening balance of -2,675 and profit this half-year of £13,212.5; we find the total artist share in the profit so far is £10,537.50. But remember, we have paid an advance of £10,000 which is recoupable against this amount, meaning only an additional £537.50 is to be paid to our artist.
As per our agreement, any earnings in the second half 2021 are reported to our client by the end of March. Below you can find an example of how this statement could look like.