Independent Film Financing - How It Works

by Deborah Hrbek

April 2008

© 2008 Hrbek Law LLC.  All Rights Reserved.

This article explains the structure of the standard indie-financing deal, often the starting point for negotiations with investors.  The formula attempts to balance the interests of the filmmakers and investors.  It enables filmmakers to secure funds while the picture is in production, and repayment is generally not required unless the film turns a profit.  The investors get an early return ("first out") on their investment with interest (provided the film in fact turns a profit), and an additional return on the "back end" if the film becomes a box office success. 

1.    Filmmaker raises money for pre-production, shooting and post-production costs of the movie (the “Budget”) from various individual and institutional investors (“Investors.”)

2.    None of the investors receive a return on their investment (“ROI”) until all items in the Budget (i.e. all budgeted expenses for the film, including deferred compensation to director, producers, staff, sales agents and other participants in the film) have been paid in full.

3.    All income from all sources (e.g. box office revenues, DVD sales, license fees from TV stations) is paid out as follows:

(a)    Distributors of the film deduct their fees and costs off the top of all distribution revenues “Gross Receipts.”  Gross Receipts less these distribution fees and costs is paid to the film producer.

(b)    Producer first has to make good on any items contained in the Budget that have not been met are paid in full, on a pro rata basis.

(c)    Producer next repays Investors are repaid the full amount of their actual investment, with interest, on a pro rata basis.

(d)    Investors who are also entitled to “back-end” compensation from the Net Proceeds of the film receive a further ROI, on a pro rata basis, out of the “Investor’s Share” of the Net Proceeds.  The Investor’s Share is typically defined as 50% of the total Net Proceeds.  The other 50% of the Net Proceeds goes to the producer (the “Producer’s Share”).  Any talent and other non-investor third parties who have been promised a back-end share in the movie are paid their percentage out of the “Producer’s Share.”

EXAMPLE --

Calculation of  ROI based on Standard Indie Film Financing Model

This example demonstrates how, in a very low budget movie, investors see a significant ROI even with relatively modest gross receipts for the film.

NOTE: The following is for illustration purposes only.  Actual figures may vary widely.

•    Investment:         $15,000      (the “$15K Investor”)

•    Budget:                $2M            (the “Budget”)

•    Total revenue, including all box office and DVD receipts:     $4.5M

•    From the Gross Receipts, the film’s distributor deducts the distribution fees and costs associated with the distribution of the film. For the purposes of this example, we assume that the distributor’s fees and costs total 1/3 of the film’s Gross Receipts.  (This figure will vary depending on the policies of the distributor and the actual expenses associated with distribution of the film.) 
DISTRIBUTOR IS PAID:       $1.5M
Balance of Gross Receipts:     $3M

•    If the filmmakers only raised a total of $1.5M towards the Budget, the balance of the Gross Receipts (i.e. the unpaid items contained in the Budget, $500,000 ($2M minus $1.5M) is paid first.
UNPAID ITEMS FROM
BUDGET ARE MET:            $500K
Balance of Gross Receipts:    $2.5M

•    Of the remaining $2.5M proceeds from the film, the Investors are repaid "first out," proportionally to the amount of their investment, with interest.  Under this example, there is a sufficient balance to repay all Investors in full with interest a total of $1.725M (i.e. $1.5M total aggregate from all Investors, plus 15% interest.)*  The $15K Investors’s share of the proceeds would be 1% of $1.725M, or $17,250.
INVESTORS PAID:         $1.725M*
$15K Investor's Share:       $17,250

Total Net Profits:               $775K


•    Of the remaining $775,000 proceeds of the film, or the “Total Net Profits”, 50% is paid to the producer of the film, known as the “Producer’s Share,” and 50% is set aside for back-end pro rata payments due the Investors, known as the “Investors’ Share.”
PRODUCER’S SHARE:        $387,500
INVESTORS’ SHARE:          $387,500

As a 1% contributor to the aggregate investment raised by the film of $1.5M, the $15K Investor is entitled to 1% of the Investor’s Share of the Net Proceeds, in addition to the repayment with interest described above.
$15K INVESTOR’S SHARE:     $3,875

   
115%* of Gross Receipts**           $17,250
1% of Net Proceeds                       $ 3,875
         _________
Total ROI for $15K Investor:         $21,125***

*   Assumes a 15% interest on "first out" monies.  Interest rates can vary, typically 9% to 20%.

**  After payment of distributors’ fees and costs and unmet items in Budget as described above.

***  This figure is for illustrative purposes only.  It is based on the assumptions and estimates as set forth in this Example.  Actual ROI will be based on actual Gross Receipts, distributor fees and costs, unpaid budget amounts and actual Net Proceeds, each of which may be substantially higher or lower than the figures set forth in this Example.