Record Contracts basics: signing recording contract, Label Music Contract

Record Contracts
Record contracts can come in many forms. This stems from the fact that there are hundreds or thousands of different record companies. From the "major labels" (EMI, Warner, Sony, DreamWorks, BMG or one of their related corporations) to "mini-majors" (A&M, Island and Virgin) to the "independents", the contract largely depends on the type of record company offering it.
When you first see a record contract, if you are like most bands, you immediately sit down and read it. However, you soon realize that it is written in a manner which defies grammatical English. Sentences run on for 14 lines, with little if any punctuation. There are terms and words which you have never encountered. Finally, the sentences are constantly referring to each other ("pursuant to 1(A)3(c)(ii)"). More than likely you have garnered a headache by this time and you might want to consider legal council like an entertainment attorney.
Often, a band will have already negotiated the "deal points" with the record label prior to retaining independent counsel on their behalf. Deal points are the basics of the contract such as any advance monies the band is to receive, the number of albums a band will record under the contract and the royalty rate they receive for each album that is sold, etc.
In all record contracts, you will be signing an exclusive agreement. This means that you will not be able to record for anyone else other than the record company during the "term" of your contract. The term is how long the contract lasts. Contrary to popular belief, record companies do not sign you and guarantee you seven albums. It may be a seven album deal, but nothing obligates the label to record seven albums. Seven albums means that the record label has the option to record seven albums. Typically, a record company will record one album and see how it does. If it sells well, they will exercise their option to record a second album. If the first album does not do well, the label has the option to drop you. Record companies require long term option contracts because if the band does do well, the label will want to make sure that the band stays with their company. Considering the label has invested a lot into developing a band and was pinnacle in its success, it is in the best interest for the label to lock the artist in for as long as they can.   Finally, the "territory" of most contracts is world-wide meaning that the record company has exclusive rights to your services as a band throughout the world.
Most bands initially form to make music, as opposed to make money, but when it comes to a record contract, it is all about money. This is the music business and a record company puts a record out to make money with product they produce and your music is that product.
Terms of the Agreement
In many contracts, the financial terms will run over 15 pages. The fundamental touchstone of a record contract is "points." Points refer to how many percentage points a band will receive as their royalty rate. On a major label, this can run between 10 and 15 percent and 9 to 12 percent on a smaller label.  So what exactly is a royalty rate?
Generally, the royalty rate is based on a percentage of the standard retail selling price. You will get full royalty rate for each full price DVD or tape you sell through normal retail channels. Normal retail outlets like Tower Records or Sam Goody.  For goods sold by other means, record companies will pay you a fraction of your royalty rate. For example, you may receive 75% of your royalty rate for sales outside the United States, 60% of your royalty rate for DVD's sold below standard retail price (i.e. albums sold at a discount) and 50% of your royalty rate for sales through record clubs. Music sold on the internet will pay you a fraction of your royalty rate. 
Record companies try to make the royalty rate paid to artists as attractive as possible. They may give you a generous royalty rate. However, in addition to the reduced royalty rate on DVD's sold outside normal retail channels, there are also many other reductions in your royalty rate.  You get no royalties on records given away free for promotional purposes. Another large deduction is the "packaging" deduction. The theory behind this deduction is that the band pays for the packaging of the DVD and tape. Typically, these deductions range from 15 to 30 percent of your royalty rate. In effect, a 12% royalty rate and a 25% packaging deduction lowers your rate to 9%. In addition, your royalty rate is often an "all-in" royalty rate which means that you must pay the producer out of your royalties. Typically, a producer will take 3 points (3%) which lowers your royalty rate even further. In all, a band can expect an average of $1.00 in royalties for each full-priced DVD sold through normal retail channels and less elsewhere. Because of these variables with defining the royalty rate can make the financial terms of the agreement lengthy and sometimes confusing as the contract spells out exactly what you will receive for every conceivable way your music can be sold.
Another thing that a band should know about their record contract is that before they will get paid any royalty they must pay back any advancement the record company gives them.  The term used in a record contract is called "recoupment". Recoupment is a fancy word for pay back. Record companies expend a lot of money on bands. They pay for all the studio time, give the band an advance, promote the band, etc. All of this money is in actually a loan to the band which the band must pay back before any royalty payments are dispersed. The band pays back the record label out of their royalties. For example, if a major label spends $250,000 to record an album, the band must make over $250,000 in royalties until they receive their first royalty check. Once a band sells enough records to pay back the amount to the record label, the band has recouped and will receive royalties on future record sales.  However if the band’s album does not sell enough units to recoup, the band does not have to pay the record company back. So any money’s advanced to the artist will not come out of the artists personal pocketbook.
There are other ways a band can make money and this is through publishing rights. This is money that the band gets to keep-most of the time. However some record company contracts, particularly small independent labels will incorporate into their contracts a provision that allows the record company to recoup money from other sources, such as publishing. This is called "cross-collateralization". This term means the band will not receive ANY money until the label gets paid back the money it advanced to the artist including costs of producing the album. The upside of this deal, you will not have to sell as many albums to become recouped, but you will receive no payments for any sales of your album until you have paid the record company back.
How do advances work?  In the past, record labels would sign a band, write a check to the band as a signing bonus and then pay to record an album. Some bands abused this and went over-budget on recording, much to the record company's dissatisfaction. To remedy this abuse, record companies developed the "recording fund." The recording fund is the recording budget that includes the signing bonus all rolled into one. The contract states that you have one lump sum to record your album, and if you are under-budget, anything left over is your advance. This has proved to be a marvelous incentive for bands to be efficient in the studio and kept the record company in their budget.
How much of an advance is good? This depends on the label and the circumstances of your signing. Although having a large advance is nice, keep in mind, the more money you get as an advance, the more money you will have to pay back to the record company, recoupment, before you receive any royalties. If you take a huge advance and your album does not live up to expectations, a label may be quicker to drop you and cut its losses. But as mentioned before, if your album does not recoup enough to pay back the record company, then you do not owe this money back.
In summary, a record contract can be quite large sometimes surpassing 40 pages long.  A record contract is filled with very detailed deal points outlining every aspect of the deal from advances, to royalty rates and number of albums the record company is willing to make.  Because of the complexity of a record contract, it is highly advisable to seek an entertainment attorney to review and look over the agreement you sign anything.

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