What Sort of Deal Terms Do Film Investors Want?

How do movies get financed? Image: Wikipedia

In a previous blog post about animation film finance we looked at what sort of investors put money into film finance, and how film makers and film entrepreneurs can find them. At Closing the Gap, a European film finance conference, Perrine Hamon of Media Deals and Thierry Beaugard of Peaceful Fish explained what sort of deal terms an equity investor would be likely to ask for when you are trying to raise money for an independent film. Sounds dry? Well, maybe. But any animator who is serious about taking their project to the big screen needs to know at least a little bit about how movie finance works.

What is an equity investor?

An equity investor is someone who will invest in your project by taking a stake in it. This is different from a bank, which loans money at interest and in general accepts little or no risk. Equity investors become your business partners, accepting the risk of failure but also sharing in the fruits of success.

What do equity investors want?

In general, it is hard to raise equity finance for film projects. This is because equity investors tend to "prefer companies to projects".  Why? Because a company tends to stick around for a while, and deliver multiple projects, rather than just the one. Companies can be grown, make profits, and then be sold.  Investors also like "clear exit strategies". In other words "when do they get their money back?" This is a vital question to answer - before it gets asked.  Explain to equity investors what the "recoupment corridors" are, and when they will get paid. Investors also want to know what the Return on Investment ("ROI") will be. How much will they make. They also want a "balanced risk". Who are they investing in? What is the team? They will want to know the track record of the participants. If you can't answer these questions, find yourself a producer who can.

What do film entrepreneurs want?

1. Financing, so they can get their projects made
2. Ownership of the IP in their projects. Often, it can be hard to retain IP rights.
3. The chance to be focused on creativity and the production of the project, rather than have to deal with sales and distribution

What are the typical deal terms that investors look for in film?


TYPICAL DEAL TERMS

Let's say a business angel (usually a high net worth individual who likes movies) invests at the development stage of a €1.5m film project. Lucky you! But what will they want in return?

Business Angel

Let's say the investment amount is €50,000. The premium (ie the uplift for the investor) will be at least 50%. Sounds like a lot of money? Film is a risky business - investors want to be rewarded well.  But what would the time frame be? - "If and when project gets financed". This can take "5-7 years".  This is a very long time horizon for an equity investor, which is why very few investors do development finance - it just takes too long to get your money back.

To solve this problem, there would have to be some back end revenue as well". But how how much? "2-3% of revenue?" suggested one producer.  "No way", replied the financier, the back end would have to be "10% of revenue" "No chance!" replied the Producer. But, "consider the risk - only 1 in 10 projects see any kind of meaningful profit participation".  As a result, this kind of business angel is very hard to find.

What is the "back end"?

The "back end" is the producer's net profit, generally called "the Producer's Net", which is to say what is left when everything is deducted and all expenses have been paid. Lots of folks can be incentivised (such as top acting talent) by a share of the back end, but you can only give away so much. In the end, there is only 100% to give away.

More Equity Investment Deal terms

Let's say a Business Angel invests - at the Production stage - into a €1.5m film project.  Say they invest €200,000. The Premium is 100%. The Revenue Share on IP rights is 3%. The Timeframe for return is 5 years. The ROI is €400,000 paid out quarterly over 5 yrs. This is a "much better deal" - say the investors. Investors generally want to be "Last in - first out" is what they want. ie they want to be in "first position" when revenues start to come in.

Ian Hutchinson of Silver Screen Partners explained that the classic deal for net profits is 50% to producers, with Investors also collecting 50%. So Ian says this model above is wrong. The Revenue Share for Investors would be more like 50% not 3%


What Must Go Into Your Business Plan?

Crucial to raising any kind of finance is a proper business plan. At a minimum, your business plan must include:

1. A good overview of the Project and the Business Sector (show that you know the business side of the field well)
2. The Company profile. Is this a company that investors can trust?
3. The Project Profile - is it a promising project, easy to sell?
4. Project comparables (similar films that have done well). What similar movies have done well at the box office?
5. Finance Plan - know your numbers
6. Sales Estimates - what do the sales people think the movie will make?

To see more about independent film financing, follow this link.  There is also a good Wikipedia page about film financing here.

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