Investing can be stressful. No, I don’t mean the kind of investing where you make a monthly deposit into your IRA that holds abstract, diversified funds of bonds of stocks. I’m talking about the kinds of investments where you hand your cash to some guy who promises he’ll turn it into more money.
If you want to invest in the movie business, you’re probably (and rightfully) worried about what happens after you make your investment. What role do you play? How much control do you have? It’s important to have clear answers to those questions before you write your first check.How much control do investors really have in the production of a film? What role do they play? Click To Tweet
The 3 Categories of Investors
Before we talk about the level of control investors have in a film deal, it’s important to understand the different types of Hollywood investors. This will help you understand where you fit into the picture.
1. The Traditional Lender
The traditional lender is a bank or financial institution. There are several throughout the United States, Canada, and Europe.
These financiers lend against paper. They want to see a distribution agreement that includes a minimum guarantee of X dollars if you deliver the film by Y date. They’ll give you (at most) 85-90% of your minimum guarantee. They demand some kind of collateral, such as the producer’s house or whatever assets they can get access to. If you have no collateral the lending percentage will go way down and the terms of borrowing will be very strict.
Whether they give you money and how much they give depends on the track record of the distributor. If you’re working with a small distributor who has a history of ripping off filmmakers, don’t expect the lender to give you money. If the distributor is financially weak or water-cooler talk of bankruptcy, the lender will give you a shitty rate, like 50-60% of the guarantee. But if you’re working with a well-respected and financially sound distributor, banks will be happy to work with you.
2. The Private Equity Firm
These are private firms with pools of investors, such as hedge funds. They invest in companies, not individual productions. They don’t really care what kind of content those companies make as long as it’s profitable. Like traditional lenders, they are solely in the business of lending money. They provide liquidity by lending big chunks of money for companies to use as a line of credit to produce content. They don’t typically require collateral from the business and if they do it will be ownership or control of the company if the the funds are not returned on the set timeline.
Like traditional lenders, these guys want to see paper. They want to see distribution agreements. If they trust your distributors, you’ll get a good deal: 85 cents on the dollar like a traditional lender would give. Maybe 90% if you’ll get good tax credits.
3. The Bored Rich Guy
The bored rich guy is a dentist, tech entrepreneur, doctor, or discount furniture store owner who made his millions doing something completely unrelated to the film business. He doesn’t know a damn thing about Hollywood, but he wants to be in the film business. I often wonder if these people participate in film investing because they want to brag to their friends about being part of a movie. Some of the investors that I have met, had no chance of making their money back, much less a profit.
This guy invests small sums of money to finance a film, but he gets screwed every time. He tends to work with shitty people who lose his money. If they produce a film, he doesn’t make any money because he got a shitty deal to begin with. I have never in my entire career seen anyone make money in this environment. (My favorite adage comes to mind: “It’s possible to make a small fortune if you start with a big one.”)
Who Has Control?
People with money always try to exert control even when they don’t know what they’re talking about. Money guys always think they are smarter than they are. The unfortunate truth, however, is that an investor only has control before they hand over the money. That’s the only time you get to make demands.
In a traditional “Bored Rich Guy” structure, once you give the filmmaker money, you have absolutely no control over what comes out the other end. You don’t have the opportunity to make changes to the management team (read: FIRE them), the producer often puts their friends in play-or-pay deals that have to be paid out no matter how incompetent or shifty they are, you have no say in creative decisions or to the ability tell the director or producer how to manage their team. Frankly, you shouldn’t do this even if you could, because managing production and distribution it’s not your skill.
But that doesn’t mean you lack any remedy. You have the court system. If the filmmaker blows your money on cocaine and strippers, you can sue him. You’ll win, but good luck collecting. If he had piles of his own money, he wouldn’t have come to you in the first place.
Most Private Placement Memorandums (PPMs) are written so investors don’t have any say in how a movie is made or cash gets distributed. Investors are passive members (that’s a legal term). If you want control, you need to be a manager (another legal term). I’m not saying you should be a manager, because that isn’t right for everyone, but you will have absolutely no power if you aren’t a manager.
Most investors simply sign the PPM they’re handed. This is a massive mistake. For instance, a lot of PPMs split waterfall income 50/50 after the investors get their money back + 10%. Seems fair, right? Not at all! No studio would ever make that deal. The studio would demand a much bigger cut. And if you have the money, you are the studio. These kinds of terms should NEVER be agreed to. Any young filmmaker will take no back-end participation and will be more than happy to get guild scale if you are providing the funds to make their movie. You should view this deal as a gift and not offer any participation in the upside.
If you invest in film, it’s important to behave like you’re the studio, not like the filmmaker is doing you a favor. Filmmakers want your money because they couldn’t get it from a studio or any other experienced film financier. You are doing the favor. Don’t trust them by giving them all the power.
So you have to push back when they write the PPM. Refuse bullshit terms that won’t put much money back in your pocket. Refuse surface-level deals that don’t break down how every penny will be spent (all labor, all jobs, all wages, line-by-line for every single day of prep, shooting, and post). And most importantly, don’t be a minority investor. No one cares about the guy who chipped in $20K or even half. Promise a majority of the investment so you can participate in the PPM construction.
When you are in control of how the PPM is created, you control the company and the property when it is done. You control who gets paid and when and how. You control how money is distributed when a film is delivered to a distributor and when the tax incentives are released. In essence the investor is not at the mercy of the producer who does not have your best interests at heart.
You Need a Production Executive
If you’re going to make an investment, you need someone on your team. It could be one person or it could be a team of people. This is a neutral third party who acts like your counsel, similar to a lawyer for legal matters. And like a lawyer, this production executive would insulate you from the noise and bad ideas that come from production so you can make decisions that are in your best interest. ALL the studios have them to monitor production and make sure their film investment is being made as planned.
Your production executive will help you exert control over your property. They make sure the filmmaker doesn’t have control of everything. And they help you, the investor, behave more like a studio, traditional lender or a private equity firm.
For instance, let’s say the filmmaker comes to you with an idea. It might be good or bad. You don’t know because you don’t know film. You say, “Sure, that sounds great – let me think about it” to the idea, then you find your production executive, relay the idea, and get his unbiased opinion about how it affects you. Is it really a good idea? Or is the filmmaker trying to fuck you? If you and your executive decide it’s actually a bad idea, you can send your executive to break the news.
Your production executive should be someone with years of experience, not just someone who’s “been around the movie business.” I’m talking about someone with 10+ years in key decision-making roles in finance and production on projects that got financed, made, and found foreign and domestic distribution (with a theatrical release) or on an OTT platform.
Yes, this executive will cost you something, but it’s well worth the price. It’s the best insurance you’ll ever buy. You like your car insurance, right? Well that’s just a bet that you’ll cause an accident one day and need someone to protect you. If you invest in film without the help of a production executive, you will get fucked. There’s no betting here. It 100% will happen. Paying an executive to look out for you will save you money every time.
Shameless plug: You need someone with my kind of experience. You need someone in your corner making sure you are getting a fair deal, otherwise the sleazy Hollywood Con Man will find ways to separate you from your cash. Contact me for help.