Top 10 Things You Need to Know Before You Sign a Major Label Deal

by Deborah Hrbek

May 2006

© 2006 HRBEKKunstler. All Rights Reserved.

1. WHAT WILL THE RECORD COMPANY DO FOR YOU?

   Most recording contracts do NOT require the record company to actually make or release a record of your music. Rather, the company is paying you (if you get an advance) to give them material that they have the right to make into a CD and distribute, if they feel like it.

   Read your agreement carefully to see what the record company is actually promising to do for you, and be sure you get them to put in writing whatever promises they are making to you in person -- before you sign!

2. HOW MANY ALBUMS IS THE COMPANY COMMITTED TO MAKE FOR YOU?

   Many artists are thrilled to get a 5- or 10-album deal – not realizing that this is almost never a good thing. When you read the fine print of the contract, you will usually find in these deals that the record company is only promising to let you deliver one album’s worth of music to them. They then have the right – “option” -- to make a second, third, fourth, etc. if they are happy with how well you are doing. In other words, they’re locking you in before you know what you are worth. What’s more, if they are not happy with you after record number one, they can drop you. Focus instead on how many albums the record company is committed to making for you. Understand what you are really getting -- before you sign!

3. HOW LONG ARE YOU TIED TO THIS RECORD COMPANY?

   The flip side of the 5- to 10-album deal is that if you are really successful, the record company will keep exercising its options and you will be stuck with the same company and the same deal until you have completed the full number of optioned albums. If you were free to negotiate, you might be able to get a better deal for your later work. So, however tempting it may be, be careful about locking yourself in for too big a commitment -- before you sign!

4. HOW WILL YOU BE PAID?

   Generally speaking, musicians have three sources of income from a record deal:

1) Advances

2) Royalties

3) Publishing income

Advances are usually paid in a lump sum, either upon signing or upon completion of the recording or both.

Royalty payments are paid as a percentage (or points) based on sales of the CD. Royalty calculations are quite complex. They work differently in indie and major deals, and virtually every record company has a different way of calculating how much the artist is to be paid.

Publishing income is for songwriters, usually a percentage based on the use of your song by others. This includes when you perform your own material on a CD (here, the record company is using your song).

You need to examine your contract carefully to make sure you understand how you will be paid – before you sign!

5. WHEN IS A TWELVE POINT DEAL NOT A TWELVE POINT DEAL?

   Let’s say the contract says you will get a 12% royalty on record sales. What does this actually mean? One thing it most certainly does NOT mean is that you will get 12 cents in the dollar for every record sold.

   Taken off the top are “packaging” costs (i.e. the jewel case and CD cover) – usually ¼ of the sales price. The record company also takes a hefty deduction for “free goods.” And there are countless other royalty reductions for different types of uses of your CD – e.g. CDs being distributed through a record club or for educational purposes will bring in less than your full royalty percentage to your royalty account.

   Be sure you understand what your royalty will mean in practice and how it will be calculated -- before you sign!

6. HOW WILL YOUR ROYALTY PAYMENTS BE CALCULATED?

   Even counting the royalty percentage the way the industry counts it (see #5 above), will you actually receive royalty payments for each record sold? Almost certainly the answer is no, if industry practice is being followed.

   The contract will generally allow for the record company to be repaid all advances before they have to pay you a penny in royalties. In industry lingo, you need to be fully “recouped” before you receive any royalty payments.

   The record company set up an account for you and place royalty payments into it. It uses that account to pay itself back for the advances and expenses associated with producing and distributing the record. Only when all the company’s advances have been repaid out of your royalty account will the company starts to pay you royalties.

   This means that, even with a high percentage royalty rate and strong sales, no royalty payments may ever reach your wallet. Make sure you understand when and how much you can realistically expect to be paid under the deal – before you sign!

7. WHAT TYPE OF EXPENSES WILL COUNT AS ADVANCES?

   Most artists think of the advance as the amount of money they are paid upon signing or upon completion of the record under a record deal. It is true that that money is called an “advance” and that it is counted as an advance that must be recouped from your royalty account before you receive any royalty payments on sales of your CD. What many artists don’t realize, however, is that the record company may also count as advances the recording costs, touring costs, producer costs, promotional expenses and many other expenses associated with turning your music into a marketable product.

   This means that as well as repaying itself out of your royalty account for any upfront money it gives you when you close the deal and along the way, the record company will also repay itself for its other expenses – out of your royalties – before you are considered fully “recouped” and entitled to any royalty payments.

   Be sure to understand what types of expenses are being considered advances – in addition to your advance payment – before you sign!

8. WHAT IS A MECHANICAL LICENSE?

   Mechanical license fees are payable to songwriters and music publishers when other people use their music on a sound recording. Mechanical license rates are set by statute – which you would pay through the Harry Fox Agency if you were making a cover tune, for example – but these can be negotiated downward by record companies directly with the songwriter and publisher.

   When you make a record deal, the record company will try to negotiate down the mechanical license rate as low as possible, because they will have to pay this agreed upon rate to you (and the publisher if there is one other than you) for each track they make of a song you wrote. Be sure to understand what you will be getting in mechanical license fees -- before you sign!

9. ARE YOU KEEPING YOUR PUBLISHING RIGHTS?

   Your publishing income is an important and valuable source of income. This includes mechanical license fees, public performance rights (e.g. payments you get from ASCAP or BMI when your song is played on the radio or in a store or restaurant), synchronization rights (when your song is used in a movie or on TV) and more.

   Don’t give these up lightly. Be sure you understand exactly what rights you are giving away as part of the record deal -- before you sign!

10. 10. WHAT LEVEL OF CREATIVE CONTROL WILL YOU HAVE?

    How will your music be used? Will you have any veto power if the record company wants to sell it to be used in a deodorant commercial? Will you have a say in what your CD cover looks like? These are called “creative controls”. Think about what is important to you and be sure to get it into the contract before you sign!

ALWAYS READ THE CONTRACT CAREFULLY AND BE SURE YOU UNDERSTAND EXACTLY WHAT EACH PARAGRAPH MEANS – BEFORE YOU SIGN!