This Article Originally Published September 1998

by Donald S. Passman

part two  |  part one

Cost Reimbursement

If the demo company doesn't want you after you do the demos, or if it passes on your deal when you come back under a first refusal, you are free to go elsewhere. When you do sign with another company, however, the Demo company will want its demo money back. Since you're not likely to be in a position to write a check, the Demo company will want it from your new record deal.

Most record companies "second in line" (meaning the ones that follow the Demo company) are willing to put up money to reimburse the cost of demos. (After all, sometimes they're the Demo company and they want their money back, too). This cost, of course, will be recoupable from your royalties, and thus it's ultimately your money. However, it still beats smashing your piggy bank.

Here are a couple of things to negotiate in anticipation of this possibility:

  1. The Demo Company should only get its money back if you make a new record deal. Period.

  2. There should be a time limit. otherwise, five years later, you might get a deal based on totally different music and find you owe money to the Demo Company. Try a year or so.
Non-Record Company Demos

Record companies aren't the only places that may be willing to fund your demos. I've seen deals where demos are funded by recording studios, producers, engineers, rich people who want to be in rock & roll, poor people who want to be in rock & roll, etc. Indeed, one of the more bizarre stories I came across was a guy who funded an entire album, but would never tell any of us where his money came from. He lived in a walled estate and always paid in cash. Ultimately, after the album was about to be finished, this guy literally disappeared, and we haven't heard from him in the last several years. It would really round out the story to tell you that this was a hugely successful album, but to date they still don't have a record deal. (Sorry.)

Since non-record company sources can't actually make you a record deal, their contracts don't look anything like the demo deals offered by majors or independents. Also, because they are not mainstream deals, there are basically no rules, and I've seen them run all over the map. Here are some of the more common arrangements:
  1. If and when you get a record deal, you reimburse them the cost of the demos, and the demo funder (let's call them the Funder) gets a 1% or 2% of retail royalty on your records. This royalty is known as an override, because it rides on top of your deal. However, the record company will take it out of your royalties, under the age-old theory that, "It's your problem, not mine."

  2. You want to limit the override to as few records as humanly possible. The minimum is where the Funder gets an override only on the specific demo recordings that are finished into masters on your record. Your argument is that the other demos didn't interest the record company. I've also seen deals where there is a smaller override if a song in a demo is re-recorded, as opposed to the demo being turned into a master. For example, the Funder might get a 2% royalty if you fix up and use their actual recordings, versus a 1% royalty if the same song is re-recorded.

  3. At the other extreme, the Funder may ask for an override on every record under your deal, which I think is overreaching. If you agree to this, you'll be married to this yutzo forever, in exchange for their relatively small investment I n your career. Ideally, the override should only apply to the first album, but perhaps you can throw in a couple more if it's necessary to make the deal. Another compromise is not to limit the number of albums on which the funder gets an override, but to say they only get the override until they get back twice (or three times) their investment. So if the Funder puts up $10,000, they only get an override until they receive $20,000 (or $30,000).

  4. If the Funder only gets a royalty based on the use of specific recordings or songs, be sure to specify their royalty is pro-rata (the royalty is in proportion to the number of cuts on the album).

  5. The Funder's royalty should only be payable after recoupment of the amounts charged to you in connection with the records on which they have a royalty, such as tour support, videos, etc. It's not fair to charge the Funder for recording costs of records on which they don't get an override, nor should they be charged for advances they don't share in.

Donald Passman is a Los Angeles-based music attorney with the firm of Gang, Tyre, Ramer & Brown. Specializing in music business law for over 20 years, his clients include major publishers, record companies, film companies, managers, producers, songwriters, and artists such as REM, Janet Jackson, Quincy Jones, Tina Turner and Green Day. On a regular basis, we will be excerpting from Mr. Passman's best-selling book, "All You Need To Know About The Music Business."

From "All You Need To Know About The Music Business" by Donald S. Passman. ©1991, 1994, 1997 by Donald S. Passman. Reprinted by permission of Simon & Schuster, Inc.

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