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Navigating Management, Production, and Distribution Deals for Up-and-Coming Artists

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Navigating Management, Production, and Distribution Deals for Up-and-Coming Artists

The music industry can be difficult to navigate for an up-and-coming artist, since there is no tried and true formula for success. Recording artists will often leverage others, such as attorneys, managers, production companies, and distribution companies to successfully launch their careers. Thus, to set a recording artist up for success, attorneys must be familiar with the legal and practical complexities associated with management, production, and distribution deals.

Presenters

Lauren Spahn
Partner
Shackelford, Bowen, McKinley & Norton, LLP

Transcript

Lauren Spahn: Hello, my name's Lauren Spahn. And today, we're going to be discussing navigating management, production, and hybrid agreement deals for up and coming artists.

   The music industry has changed drastically over the last decade. We've gone from buying CDs, to downloads, to streaming, and the accessibility for independent artists to release music themselves has become more prevalent because of technology and because of these various distribution methods. Because of that, the deals that upcoming artists have been presented with has changed in order to accommodate for the new ways that artists release music, and the fact that artists no longer have to turn to a major label in order to get a deal for their music to be distributed or released.

   As such, we are going to take the time to get familiar with the complexities of these various types of deals. These deals include management deals, production deals, and hybrids of those two deals. We're going to learn about the mechanics of deal-making and what variables are important in negotiating these deals. We're going to learn the differences between these deals, as well as the separate purposes of them. And we're going to learn how these deals may be combined in order to create a hybrid structure.

   The first basic question is, how does an artist typically get their first deal? The artist typically has key members of their team that may occur at different points in time. These key members would be their manager, their attorney, and/or their production company. These relationships are often developed organically. And over time, for example, a manager or a production company may reach out to an artist, or an artist may reach out to a manager or production company. The parties may meet at an artist performance. They may also be introduced through mutual connections. Once an artist starts working with either one of these parties, they are typically presented with a deal structure that involves the rights that are given to each party.

   A artist at that point would typically turn to an attorney, or be introduced and speak with and engage an attorney to help them navigate and negotiate the deal that's being presented to them. The attorney will typically first negotiate the material deal points, which we will get into when we discuss the specific agreements. And once those material deal points have been agreed to, then the legalese will be negotiated in a long-form agreement. At the point that the parties are able to come to an agreement on the long-form, then both parties will sign, and they can start down the path of building the artist's career.

   The first deal that we're going to discuss is a management deal. A manager is essentially responsible for running the day-to-day career of the artist. They typically do not fund the artist's career. Instead, they act to help further the career in all aspects of the entertainment industry. This would include live performances, recording, publishing, agent, really helping to put together all the puzzle pieces, and building the foundation so that the artist can continue to go out and make money and enter into new opportunities. Oftentimes, artists and managers operate under a handshake deal. However, it is safest for both parties to ensure that a contract is in place as this helps to detail the parameters around which their relationship operates.

   In a management deal, there are a number of key points. Typically, a manager receives 15 to 20% of artist's gross income related to the various aspects of the artist's entertainment career. As I discussed before, this could include live performance, recording, publishing, sponsorships, endorsements, book deals. It really is the entertainment industries as a whole because that manager is key to helping navigate, secure, and administrate the various deals that the artist has in place. The 15 to 20% commission typically varies depending upon the stature of the artist. We often see the higher-end at 20% on developing artists, where the manager is going to have to put more time and effort into building that artist's career.

   While commission is typically taken off the top, an artist's attorney would go in and negotiate which situations entail and include net income scenarios. This may include, for example, merchandise. If the artist is paying for the cost of raw goods, the shipping, the taxes, the storage of merchandise, the artist typically is able to deduct those costs off the top before paying the manager their commission. Another example may be live performance. If an artist is only making 1,000 or $2,000 per show, and they have to pay their musicians, their transportation, their hotel, et cetera, out of that $2,000, an artist's attorney will typically go in and negotiate certain floors that have to be reached in order for commission to be payable. For example, the contract may say that in the event the artist earns $2,000 or less for a show that that income is not considered commissionable income under the agreement.

   These are both examples of ways that the attorney can help give wiggle room for their artist's client. When instead of taking the commission off the top, there are certain permitted deductions. In the majority of management agreements, you will see a list of what is excluded from these management commissions. You may see specific income related to certain agreements or certain recordings that have been released excluded because perhaps those deals or those recordings were released prior to when the management agreement went into effect. And so the artist has carved out prior income streams that they secured themselves in order to prevent the manager from commissioning off of it.

   In more rare situations, when an artist is not generating significant revenue, the artist may pay the manager a monthly stipend or salary, and that amount is paid so that the artist can have someone who is assisting with booking shows, making connections, keeping their schedule together, but perhaps the artist isn't quite at a place where they're generating enough revenue to be able to pay a reasonable amount in commissions to a manager. More often than not, we see managers who come to the table because they believe in an artist, and they believe in the long-term success of the artist and how them as a manager can help elevate their career to make money. And so they're willing to take a risk and only get a percentage in order to make that happen.

   Whether or not the situation is a monthly stipend versus a percentage, and whether or not that percentage is 15 to 20%, or even more or less than that depends on a number of factors. And those factors could include the artist's popularity, the existing revenue streams, and the manager's experience and connections. As we just discussed, oftentimes, a manager gets in at the early stages of an artist's career, and they believe in the long-term success of the artist and what they think the artist can achieve, because that would equate to more revenue down the road, which means more commission in their pocket. This brings us to another important aspect of the deal, which is the term.

   The term of the management deal is typically for an initial period of one to two years. After that initial period, there are typically option periods that are exercisable in manager's sole discretion. Those option periods are typically one year in length and can range between two to four separate option periods. If you have an initial period of two years, and you have two one-year option periods, the entire length of the deal could ultimately end up being four years, but really, it's up to the manager and in their discretion as to whether or not they want to exercise those options.

   The manager wants to build in those option periods so that if it's not working out, or they still aren't generating any revenue in commissions, or they decide that they want to focus their time elsewhere, they have the option to terminate the deal. On the flip side, if a manager is investing in an artist's career with their time, they want the option to extend the term with those option periods in order to allow them to participate in the long-term success that the artist may be having or may be on their way to having.

   Now, I've also seen where the option periods are built on milestones. For example, if the artist generates X amount in revenue from the prior year, or if the manager helps the artist get a major record deal, those may be triggers that allow the manager to have additional options under the deal.

   Now, once the deal is up, the manager is not owed any money. However, this can be combated by including what we call a sunset clause into the deal. This allows the manager to participate in commissions after the term. The sunset clause is heavily negotiated in two different ways. The first way is the length of the sunset clause. The length typically can run between two and five years. Oftentimes, the length of the sunset clause will depend on the length of the deal. If the deal itself was four years, you're more likely to have a sunset clause that's going to be three or four years. However, if the length of the deal was two years, it's rare that you would see a sunset clause beyond two years.

   The other important aspect of the sunset clause is the percentage that's to be paid to the manager, as well as what's included in that percentage. Now, the reason we call it a sunset clause is because the percentage decreases over time, just like the sun is descending when it sets. If we have a three-year sunset clause, we would see a decreasing percentage in year one, two, and three. For example, if the management commission was 20% during the term, we likely would see a sunset clause of 15 years in year one, post-term, 10% in year two, post-term, and 5% in year three, post-term.

   Now, what's included in the sunset clause, what income streams? It is typically going to be divided into agreements and products. For agreements, it would be agreements that were entered into during the term of the management agreement. You may even add language that says, "Entered into, or substantially negotiated," during the term of the management agreement. If the artist is still receiving monies over or monies from those specific term agreements, then they may be included in the sunset clause commission. The same goes for products. We often will include parameters around products that are created and/or released during the term of the agreement, and we call them term products. Those term products would then fall under the sunset clause as well.

   Another important term to think about when negotiating a management agreement is how the manager is reimbursed for expenses. A manager may have to fly to a different city to see an artist play, fly to a different city for a meeting. They may have to spend money on graphics in order to create one-sheets or important documents for the artist. However, before they can incur these costs, there's typically parameters around what and how those expenses become reimbursable. We often will put in a single maximum limit that has to be pre-approved by the artist. For example, the manager may not be able to spend an excess of one single expense of $1,000 without the artist's consent. The other parameter may be, the manager cannot spend in excess of $1,500 per month without the artist's prior written consent.

   These parameters help the manager to continue to operate on a day-to-day basis without having to go to the artist and saying, "I have to print these flyers for you. Can you reimbursed me for $20?" Or, "I have to hire this graphics designer for $100. I need you to approve this in writing." The artist is trusting the manager to undertake certain responsibilities. And in turn, the manager does not have the administrative burden of having to come to the artist for any and every expense that they potentially incur.

   Now, let's go through an agreement checklist as it relates to management agreements. We've already discussed the term. We've already discussed the manager's commission and what is defined as commissionable income. We've already discussed the sunset clause. We should take a minute and take a look at the manager's scope and the artist's obligations. The scope of the manager's obligations, responsibilities, and rights can vary, but generally, the manager is acting on behalf of the artist. They're trying to bring artists new opportunities. They're trying to handle the day-to-day business decisions of the artist. And they're often given wide discretion in the acts that they can take on behalf of the artist.

   As a attorney for the artist, you want to make sure that you limit the manager's scope, that you limit it in a way where they cannot bind the artist without the artist's approval, they cannot enter into agreement without the artist's approval. On the flip side, if you're representing the manager, you often will put in carve-outs for when you can take action without getting the artist's prior written approval.

   Now, the artist's obligations are a little bit different because it's essentially the artist's career that the manager is assisting with. The artist has a bit more discretion in the decisions that they make and the fact that they do not have to do or enter into deals that the manager brings to them. However, the artist often has the responsibility to make their career a priority, to use best efforts to further their career, and undertake activities and opportunities that can help further their career. It's a balance between the artist having control over the ultimate decision, but the manager helping to guide and assist the artist in making those decisions and embarking on those endeavors.

   The last important term that I want to discuss is what we call a key person clause. Oftentimes, a artist may be signed to a management company. This management company may be made up of 10, 20, 50 different employees. However, oftentimes, the artist is entering into the management agreement because of a specific person. Although they are entering into the agreement with a larger company, they are entering into it with the intent that their day-to-day person is going to be someone specific. And so an artist's attorney will often put in what we refer to as a key man or key person's clause.

   This clause basically says that if this one person stops providing day-to-day management services for the artist, that the artist, upon reasonable notice, can terminate the agreement. This is a heavily negotiated provision because the management company doesn't want to risk losing the artist if that one person stops working with or being affiliated with that particular company. It's balancing the company's desires with the artist's desire that they are doing this, not because of a company as a whole, but because of a particular individual or a few individuals that work for that company. And so, depending upon the situation, it is a provision that we often see heavily negotiated on both sides of the deal.

   The next type of agreement that we are going to discuss is a production agreement. A production agreement is often referred to as a artist development agreement as well, because in both instances, the company, whether it's a production company or an artist development company, is funding the development of the artist's career. This is most often connected to funding master recordings or assets that relate to master recordings, such as videos, marketing, photos, those types of intellectual property that tied back to the recording that the artist is creating. But in these instances, the company is going to be funding the creation of those types of elements. Oftentimes, the company funds the creation of the recordings and their related assets in exchange for ownership of the recordings.

   And really, the goal here is for the company to come in and take the artist at the beginning stages of their career and put money into helping create the recordings and what they are putting out there in order to help them gain popularity, help them gain exposure, and potentially sign them to a major record label. In these instances, the company often has a back end participation or ownership in what the artist is creating. For example, it may be that they are able to retain a portion of the money that the artist receives, that they sign a record label deal. It may be that they retain a portion of the artist's overall income. It really depends on the structure of the deal.

   In looking at the production company deals, we'll first discuss the master recordings and how they work. More often than not, the production company will agree to fund either a certain amount of money or a certain number of recordings. And the production company will often retain 100% ownership of the master recordings and/or potentially split the recordings 50/50 with the artist. The production company is able to retain all of the income that comes in from the recordings once they're exploited. And they retain that 100% of income until their investment has been recouped.

   Now, the percentages of ownership or the percentages of income will often change depending upon the amount of money that's invested by the company. If the company is investing more money, they may have the option to retain a larger percentage of income. Typically, once the company has recouped their investment, they are able to then split the income 50/50 with the artist. Now, the 50/50 split is most often off of net receipts. Company is able to deduct the spent expenses that are incurred before the artist gets paid. Once the investment is recouped, these expenses could be monetary amounts relating to taxes, shipping, distribution fees, all of which would be taken off the top before the artist is paid their percentage.

   There is typically a provision in these deals that gives the company the right to either negotiate themselves and/or be part of the negotiation of a label deal for the artist. These provisions typically go into detail about who has the right to negotiate what, what is considered a label deal that's worthy of this, if a deal is secure and agreed to, how the ownership of the master works, as well as the payment to the company that will be owed for that specific deal.

   Now, all of these variables, or all of these elements can be different depending upon the structure of the deal. Typically, the more money or more amount of masters that are funded by the company, the more rights they will have to negotiate and participate in the label deal. Oftentimes, the company may be entitled to a portion of any in-pocket advances that the artist receives from the major deal. The company may also be entitled to a percentage of money that's made off of, not only the recordings that were made under the production deal, but also subsequent recordings that are made and exploited through the label deal. When it comes to the premise of these production and artist development deals, they typically hinge on the creation of masters, the exploitation of masters, and what happens if, and when the artist gets a major label deal, or a label deal, however, that is fleshed out.

   Now, a production company may end up funding additional activities outside of the master recording. These activities may include merchandise. They may include helping the artist pay for tour support or production in order to go out and do live performances. It may include other artist development elements, like a vocal coach, or someone to come in and help with the artist's wardrobe and styling. In the instances where the company is participating in these types of additional activities, the company may be entitled to a percentage of the revenue received by the artist in connection with these types of activities. For example, on the artist development front, the company may be entitled to five, 10, 15, even 20% of the live performance income or the sponsorship income that the artist receives. And this exchange is due to the fact that the company is helping to develop the artist in those areas, and is putting money into it. And therefore, they should be entitled to a percentage of the money that's received.

   When it comes to merchandise, typically, if the merchandise is funded by the company, the company may be entitled to first deduct all of the costs off the top, and then retain 50% of the income for itself. If the company is not funding the creation and shipment of the merchandise, but instead, is maybe helping to fund an artist or a creator to help flesh out what the merchandise would look like, they may be entitled more so to a smaller percentage, such as the five, 10, 15, 20% that we discussed before.

   Now, in the instance of a production company, we often look to whether or not it would be appropriate for the artist to still have a manager at that time. Now, a production company serves a lot of the elements that a manager would. And so it's not necessarily a situation where you would have both, but in the long-term, an artist does want a manager who is not the person that's funding the activities, but is more so the person who is guiding and acting directly on behalf of the artist to help maintain a balanced team and a balanced set of representatives on their behalf.

   Now, going back to our agreement checklist, we first have the term. We discussed how this may be tied to a specific amount of money or a certain number of recordings. It may also include the ability for the company to sign the artist to a major label deal. The term is often dictated based on these elements. The term may be an initial period for a certain amount of time, such as 18 months, 24 months, or until a certain number of recordings have been delivered and exploited. The term may also include options that are tied to the major label deal and/or may make part of the term based on if the artist does get a major label deal. For example, the company's ability to participate in the deal if they do bring a deal to the table for the artist, maybe that they get to participate in a certain percentage of income for the length of the major deal, however long that is.

   The next item on the checklist is royalties. As we discussed, these deals are typically based on net receipts. They may be split 50/50 after costs have been recouped. That percentage may change based on the initial investment that the company makes in the artist. And oftentimes, there's a provision that allows those royalties to be converted to whatever type of royalty structure that major label deal contains.

   On the next item on the checklist, we have budgets and funds. Now, we covered the three main elements that the company may fund. The first is the master recordings. The second was the artist development, such as live performance cost, production cost, vocal coaches, things of that nature. And the third is merchandise. Depending upon the three types of funds that the company may be investing in, those things are typically laid out in the agreement. The biggest example here is going to be the master recording fund or budget as that will dictate how much the company is willing to spend in the creation of these recordings, and often then contained how those specific budgets or funds are recouped and paid back to the company.

   The next item on our checklist is artist obligations. The artist has a number of obligations that could be detailed in the agreement. Those obligations can range from when, how, what type of quality master recordings the artist has to deliver to company. There may also be obligations for when and how the artist has to account for those revenue streams outside of master recordings, as well as what happens if the artist does not pay the company within those accounting provisions. For the artist, the artist is typically assigning their exclusive recording rights, and potentially, their exclusive merchandise rights to the company, therefore, obligating themselves to only render those services for the company directly. They could not go out and secure an additional merchandise deal if they have already given those exclusive rights to the company.

   We also have the production company's obligations. The production company has the monetary obligations that they've committed to. They also have the obligations to account to the artist for money that comes in, and remedy that with the cost and expenses and what's payable to the artist. They may or may not have an obligation to put out certain recordings within a certain timeframe. That is often a point that is negotiated.

   The last item that we have is the override royalty. This is the royalty that we discussed that the company may be entitled to if the artist gets a label deal. This royalty is negotiated in a way that dictates when that override is due, how much is due, and the length of time that it is due to company. It could be that it's only for a certain number of recordings or a certain number of contract periods. It could be that it's for the length of the label deal. It could be that it is payable on the same terms as the artist's royalty. It could be that it's payable irregardless of if the artist has recouped the cost and expenses and their advances under the label deal. It's important to consider what side of the table you're on when negotiating all of these items, because if you represent the company, you want to make sure that you get paid as much as you can for your investment, and as soon as you can, and also that you have some type of control over the recordings and over when a label deal may be the right decision.

   On the artist's side, you also want to have control over when and how the company is paid, and whether or not they can bind you to a label deal. You may want to put in parameters for the label deal, where they cannot bind you unless you get paid a certain advance or a certain royalty structure. But all of these things are things to think about when doing a production deal.

   The third type of agreement is more of a hybrid between the management deal, where the manager is typically furthering the artist's career, but not funding it, and a production deal, where the production company is funding the artist's development component of the artist's career. In a hybrid management-production deal, it is often a management deal with a production component to it. While it may not go into full detail surrounding every income stream that a production company may be entitled to, it would have the basic premise of what the manager can commission off of with a component that allows for the company to fund the creation of recordings.

   If the company elects to fund recordings, then the income related to the recordings would be treated separately from the income that the manager can commission from. Typically, these two separate income streams or revenues would not be crossed with each other. If the company is making money from management commissions, they can't also turn around and try to collect their management commissions from the money made from the master recordings as those two things would be considered separate.

   Oftentimes, the purpose of this is for the manager to have the long-term management relationship in place with the client. This relationship allows the manager to take their typical commission of 15 to 20% for X amount of years. However, it also allows the manager to invest money to help get the artist to a place where they can secure a label deal. And in exchange for that, the company will have elements of that production deal. All in all, once a deal is secured, the company is going to only continue to manage the artist and their rights and the artist recording services, or creating and funding masters will be eliminated once the deal's been converted to a label deal directly for the artist.

   The checklist for this type of deal is going to be a hybrid of what we've discussed for both the management and the production deal. But I think the key thing to remember here is that, oftentimes, because a manager is working purely on a percentage basis, it may be a long time before they are paid anything. And so if the artist is not in a place where a label deal would make sense, they're still on that artist's development path, a manager may fund the creation of recordings to get them there. And then there are mechanisms that allow the manager to bow out of the production side of it, but continue to maintain the management side of it.

   Now that we've discussed the three types of agreements that we are seeing for up and coming artists, the management deal, the production deal, and the hybrid management-production deal, I think it is important that we take a few minutes to discuss distribution deals, because distribution deals may play a role in these deals, but they're also important because they are what helps the artist get their music out.

   Distribution companies are the driver of getting the artist's music into platforms, such as Spotify, Apple Music, Amazon Music, and are the mechanism that the artist's music is made widely available to the public. Artists can handle distribution themselves through companies, like CD Baby, or TuneCore, but oftentimes, the artists need distribution platforms that offer a little bit more than just putting the music or getting the music up on those streaming platforms. These additional services may be helping to get the artist's music onto playlists. It may be providing additional marketing services to help get the artist's name and the music out there, but the distribution company is really the fundamental part of how an independent artist would get their music out there for everyone to hear.

   There's two main categories. As we discussed, there's more of a do-it-your-own, such as the DistroKid, CD Baby, or TuneCore. An artist can subscribe to these services themselves online, and the agreements are standardized. The services typically take a percentage, roughly 10% of the royalties that are earned. However, some are fee-based. It's a flat fee to get one song out there, or it may be a flat monthly fee to get as much music as you want. These services seamlessly distribute an artist's music, but do not provide the playlisting and marketing services that we previously discussed.

   Now, the other type of deal is a deal agreement where the company must agree to take you. The artist must be able to strike a deal with one of these companies in order to utilize the services that they offer. Companies include Orchard and AWAL. These services typically take a higher percentage, more like 20 to 30% of the royalties that are received. And the reason for this higher percentage is the heightened services that are offered, such as playlisting, marketing services. There may even be a fund that is given to the artist for marketing or creating photos and videos, and the like related to the music that's being put out there.

   The deal agreements are typically for a set length of time. It may be anywhere from one to three years, whereas the DIY options typically provide an option that you can withdraw the music within X amount of days. Those are things to keep in mind. If an artist has some traction, they may be able to get a deal with a company that offers heightened services. But if they're unable to do that, then there are DIY options available as well. These deals also tie into the other agreements that we discussed because a production company has to have a means for distribution.

   And so if the production company has the exclusive rights to exploit the artist's music, and they're not at a place yet where they can retain a label deal, they may strike a deal, or already have a deal in place with one of the deal options, or they may go ahead and themselves just put the music through a DIY method. The artist's music may be tied into one of these types of deals or one of these types of distribution deals merely by the fact that they've signed a production company, because at the end of the day, the production company has to get the music out, too. And they're likely going to get the music out through one of these methods before they enter into a label deal.

   As we discussed, there are a number of deals that up and coming artists consider. These include the management deal, the production deal, the hybrid deal of management and production, as well as distribution. Today, music companies look at a variety of metrics to help determine whether or not to invest time, money, or services into an artist. And those metrics include brand power, audience reach, social media metrics, monthly listeners and streams, ticket sales. And the higher an artist's metrics are the more leverage that they have in negotiating any of the deals that we just discussed. It's important to take a look at where an artist is in their career, what the best situation is for them and their music, and where they're out at, and to make sure that you reach a deal that makes sense for the various parties so that the artist's music can get out there and everyone can make money.

   I think that the one important thing to think about in any of these deals is whether or not the artist has the opportunity to be competently represented when reviewing any of the deals that are presented to them. Representation most often comes in the form of an attorney, an attorney who understands the industry, they understand the types of deals, as well as the typical market percentages, payment, et cetera, that is involved in these types of deals.

   Artists who are up and coming, who are looking to enter into one of these deals often does not have the funds to pay for a New York, LA, Nashville, entertainment attorneys hourly rate. And so they get into situations where they don't understand the dynamics, and they think what they're getting may be a good deal when the terms of it are very well under market value. And so the artist will often try to find a way to have an attorney advise them on the major points, and maybe pay a flat fee for understanding the agreement better, but not paying for a substantial negotiation and redraft of these agreements.

   Now, if a artist has a manager, that manager may be able to advise them on the important points of the deal, such as, if a distribution deal comes their way, they may very well know those market rates, but again, an artist has to be careful to make sure that they're educated, and that they read, and that they talk with other fellow artists who are in a similar position with them to understand how these deals are structured and what the market terms typically are.

   It's important as lawyers to remember when up and coming artists are in need of representation, that we are able to walk them through these various structures, why they are important, how they're typically handled, and what percentages or monetary amounts are market rate, so that they know the fundamentals of what they're getting into, and whether or not it is, or isn't a market deal that someone in their position should take or should consider pushing back on, or frankly, should even walk away, because there are a lot of deals out there that are very one-sided, that are very unfair, and can have a very negative impact on the artist's career moving forward.

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