Your Slice of the Pie Part II: When Do You Get Paid?

I haven't written anything about comics in a few weeks because I've been working on creating a independent artists merchandising platform (See Do You Want to Create Merchandise for Your Comics? ). I'm still testing the feasibility of that business, but I'd like to take a break from that and discuss the ways time impact a contract. This essay will focus on the most important short term impact; the time it takes for you to be paid.

Payment Timing

The most important thing to understand about working with a publisher is that payments are traditionally paid in lump sums at specific periods during the year. For instance, let's say your publisher reports sales on a quarterly basis (4 times per year) and pays royalties thirty days after each reporting period. Let's also assume that your new book hits the stores on January 1, 2014. This means that you'll see your first report on March 31st, 2014 (or the first business day after that) and the earliest that you'll see the first check is April 30, 2014. Payment cycles can be monthly, quarterly, bi-annually or annually. The rise of online sales can speed up the reporting process to almost real time, but the publisher might still delay payment for various financial reasons.

Not So Fast

Keep in mind, the earliest point where you might get paid won't always be the day you get the money. There are several factors that contibute to payment delays that have nothing to do with negative intentions from the publisher. A delay in payment can occur:

• if the publisher pays you any advance prior to the release of the book (See Your Slice of the Pie Part I: Net and Gross Profit). In this case, you won't be paid until your percentage of royalties exceed the money you were given up front.
• if the cost of producing the book and deducted from the gross sales exceed the actual sales, then you won't get paid until sales exceed costs (See Your Slice of the Pie Part I: Net and Gross Profit)
• if the publisher only pays royalties after a certain threshold is reached (normally $50 or $100) then you won't be paid until the pay cycle where your share of the royalties crosses that threshold

Watching the Clock

When you are thinking about the practical effects of payment timing there are two things to keep in mind. First, don't expect to see immediate payment for a new book unless there was an advance up front. Very few independent artists rely on just creator owned book sales to make a living, but it's worth pointing out that you don't want to count on paying February's rent with the money from January's book sales. That money might not come until April or May. The solution to this is to supplement your creator owned income with work for hire gigs (See Entertainment Contracts 101: Creator Owned vs. Work for Hire) that at least in theory are paid much faster.

The other thing you want to avoid is forgetting about your royalties entirely. In some extreme cases (large deductions from gross, annual reporting and rolled over payments), years could pass before sales reach a point where you start to collect royalties. In the majority of cases, the publisher will just send you the money even if you don't keep track. This is a nice surprise (the industry equivalent of finding money in the pocket of an old coat) but you don't want to get into a situation where you forget and the publisher forgets and you never get paid for your work.

While I often advocate for creators to negotiate changes to their deals, payment timing is something you need to understand not try to negotiate. The payment systems of most publishers are tied to their accounting systems and their overall business operations. It is worth asking for a change if the publisher seems flexible, but unless you are Stan Lee most creators will not be in a position to get this change (See David vs. Goliath: Negotiating Power in Comic Contracts). The best option you have is to set up some kind of long term reminder of the payment terms of all your books at the beginning of the deal.

Now that we've explored the short term effects of time on creator owned deals, next week I plan to look at the long term effects of tying up intellectual properties and the not so philosophical concept of eternity in the comic book business.

If you have any questions, please feel free to ask.

Have fun.
Gamal

PLEASE NOTE: THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. IF YOU HAVE A LICENSEING OR INTELLECTUAL PROPERTY ISSUE, DISCUSS IT WITH YOUR LEGAL ADVISOR OR CONTACT C3 atgamalhennessy@gmail.com FOR A FREE CONSULTATION.

Your Slice of the Pie Part 1 (Gross and Net Profit Concepts in Creator Owned Deals)

A couple of weeks ago I introduced the different types of rights you could license as a creator and the different types of revenue you can get from a licensed work. In that post I hinted that there were specific concepts that impact how much you’re paid on any given deal. This post (and probably the next few posts) will go into more details about the economics of creator owned deals.

Types of Revenue

As a refresher from the earlier post, I need to point out that the various ways that creators are paid in creator owned deals. The three major ones are:

• A royalty is a percentage that the artist earns for every finished unit that is sold. For example, an artist might receive 30% of every one of their comics that is sold to the public.

• An advance is money that is paid before the work is finished. For example, a writer of a novel might receive money up for her novel based on the proposal not the finished product.

• A minimum guarantee (MG) is money paid up before the work is finished, based on anticipated sales. For example, if a toy company plans to sell a new licensed toy for $10 and the creator gets 10% of that sale, then the creator gets $1 per unit sold. If the company expects to sell 100,000 units, then the MG that the artist gets for this deal is $100,000.

Definitions of Revenue

In general there are two ways that revenue is calculated for your royalty or minimum guarantee. There are gross profit and net profit.

• Gross revenue or gross profits is the pure income that a product or service generates.

• Net revenue or net profits is the income that a product or service minus certain expenses.

In the vast majority of cases, publishing deals are calculated by net revenue. The key for a creator is to know what is being included in the definition of net revenue and avoid situations where the expenses are always greater than the revenue generated.

Examples

Question: Let’s say you produced a comic called the Greatest Comic Ever (GCE for short). A publisher says they are willing to make a deal with you to publish GCE. They offer you 50% the wholesale profits as part of the deal. The comic sells for $2 wholesale. Is this a good deal?

Answer: That depends. The truth is there is no way for you to know if this is a good deal or not until you understand how the contract defines profit.

• If the contract says you get 50% of the gross profits then you get $1 per book sold.

• If the contract says you get 50% of the net profits then you have find out what is deducted from the gross to calculate the net.

The Net Revenue Trap

It is a fairly common business practice to deduct the cost of goods sold from the gross to determine the net. Cost of goods sold means whatever the publisher has to pay to produce and distribute your book. Those costs can include editing, printing, shipping, advertising, returns and a few other items. Most publishers track their costs in a document called a profit and loss sheet, so they know what percentage of every book goes into the cost of goods sold. Many publishers will list exactly what goes into the net calculations. This is helpful for figuring out where the money is going.

The problems occur when the creator has no idea what goes into the net calculations or the definition of net is so broad that it wipes out any potential profit for the creator. In the most unscrupulous contracts, the publisher will creatively expand the definition of net revenues to the point that the creator never gets any profit for his work even if it sells millions of copies. For example, if the wholesale price of GCE is $2 but the net deductions are $3 per book then the net profit is -$1 per book. That means you get $0 no matter how many copies the book.

Playing Your Position

It is unrealistic for an artist or creator to understand the nuances of licensing revenue, especially when they first enter the market. You need to focus on your craft and create the best property you can. You also need to have access to financial and legal professionals who can explain potential deals to you and allow you to make informed choices. That is why it pays to break down each contract and understand its implications before you move forward.

Next week, I’ll try to explain the concepts of recoupment and payment cycles to give you a better idea of when you can expect to get money from a deal.

Best

Gamal Hennessy

PLEASE NOTE: THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. IF YOU HAVE A LICENSEING OR INTELLECTUAL PROPERTY ISSUE, DISCUSS IT WITH YOUR LEGAL ADVISOR OR CONTACT C3 AT gamalhennessy@gmail.com FOR A FREE CONSULTATION.