When two plumbers from Jersey City decide to go into business together, they know enough to draft a partnership agreement in writing together. For this reason I am always astonished by the fact that bands earning tens of millions of dollars often never get around to formalizing their relationship with an Internal Band Contract. And more than once in a while, this neglect and lack of a written agreement bites them in the ass.
The best time to make an Internal Band Contract is early on in the bands career, or right now if you don't have one, its not to late. When everyone is still friends, and kissy-face is the easiest time to work out the details with everyone. When band members are fighting with each other, particularly if there's a lot of money on the table, you may find yourselves killing the goose that lays the golden eggs as well as paying for that entertainment lawyers new vacation home in the British West Indies.
I know of a major group a number of years back that had no formalized contract or agreement. One of the bands members got pumped up by family who told him he was the real star of the band (even though he did not sing or write music) . So he started a fight to stop the other band members from using the group name, both sides got so angry they couldn't agree on anything with each other and finally stopped talking all together. Because they were set up as a corporation, and became deadlocked on every conceivable issue, the court appointed a neutral third director to break the tie and move the corporation forward. The appointed neutral third party was a tough, no nonsense ex-judge, who had done this for many bitterly fighting corporations in the past. After six months of long, difficult, negations with both parties no progress had been made and the judge, saying, "he had never seen anything as nasty as this in his career" disappeared into the sunset leaving behind no progress and a large bill for his efforts. The upshot was that litigation lasted over nine years, and cost the parties over one million dollars in legal fees. the irony is that the band broke up early in the process and the band member who started the fight ended up broke and filling for bankruptcy. All this could have been avoided with a simple agreement and a couple of hours of planning among the members of the band.
So make the time to take care of it now. I know that nobody likes to talk about anything negative (like a band breakup or death of a band member) when ever thing is working really well. But, believe me, when everything is going well is exactly the time to discuss it, because you can all do it in a friendly and respectful way. Its like having insurance, you may never need it, but you will sure be glad you have it if you do.
If you are an artist in a group of more than one person, then you should have a written agreement between the members of the group addressing at least the issues, I outline here for your consideration. You should consider forming a corporate entity for your group, which will protect your individual assets from liability related to group activities if you have not already formed one.
The major difference between having a partnership or corporation are the tax planning aspects (which could fill a large book by themselves), the liability limitations, and the fact that corporations are more expensive to setup and run, otherwise, it doesn't make much difference whether you're a corporation or a partnership. By liability limitations, I mean that corporations limit what assets someone suing you can grab. In a corporation, someone can only get the assets of the corporation. Within a partnership, however, someone can grab both the partnership's assets and the personal assets of every partner. (something to carefully consider) when planning how to organize your business.
The only mechanical difference between the two kinds of entities is that to form a partnership, you need a written partnership agreement, and if you want a corporation you need both a written shareholders agreement ( meaning an agreement among the shareholders, who are the owners of the corporation ), and employment agreements between yourselves and the corporation.
For the purposes of this discussion, I'm going to use partnerships because they are simpler, but all these principles can be built into a corporation just as easy if you want to.
Your most Important Asset
Can you guess what your most important asset is? Apart from your goods looks, charm, and talent, your most important asset is the group name. (Note: You may want to seek advice on trademark law prior to deciding on a name and/or to determine if you want to apply for a federal trademark registration for the name.) So whatever you do, by all means figure out what to do with your bands name if there's a dispute, You need to think through everything about the band name, such as what happens to the name if:
- The lead singer and songwriter leave the group.
- The drummer who doesn't write music or sing leaves the group.
- Three out of five members leave the group to form a new group.
- The group breaks up totally
Who owns the band name? What happens to the band name if the band breaks up or a band member quits/is fired? Who, if anyone, can still perform using the name? (Everyone must still be involved? The key player(s) or founder(s) must still be involved?) Obviously, there are thousands of other possibilities, but all of them can be covered with a few general rules. This means dealing with the name can be anything you want it to be, but most common solutions run along these lines:
1) No one can use the group name if the group breaks up, regardless of how many of you are still performing together (short of all of you, of course).
2) Any majority of the group members performing together can use the name. For example if there are seven people in the band and it breaks up any four of them together can use the name.
3) Only the lead singer can use the name, regardless of who she is performing with.
4) Only the songwriter who founded the group and thought of the name, can use the name, regardless of who they are performing with.
5) Only the singer and bass player can use the name as long as they perform together, but if they don't, no one can use the name.
If one or two people really created the unique sound of the band, I have always thought they should have the rights to use the band name, because the others without them would not truly represent the group to the public. Many groups choose to operate on a "majority rule" principle, regardless of that spirit. Anything you decide is ok, as long as it has some rational basis and a judge can understand it. Just do something!
What happens if you do nothing? Well as I related in my horror story, the law is not real helpful, in fact, there is not much law on the subject. This is because most disputes are settled privately, even though they start as a lawsuit they go to arbitration. The most likely result is that your band name will be treated the same as any other business partnership asset - meaning any of the partners have the non-exclusive right to use the band name. This means you could have two or three bands using the same name, and then you have the question of which one(s) may be defrauding the public. The argument is that one or more key people are the "essence" of the group and anyone using the band name without them misleads and defrauds the public. If you think this sounds like a real mess and expensive to resolve your right! So get this resolved now!
Next item Percentages
Now that were working on an agreement, the next important thing for you to decide is everybody's percentages. You may be surprised to learn that there are many bands which, despite laughing, giggling, grabbing each others ass on stage, are in fact owned or controlled by one or two band members and everyone else is merely a hired hand. being a hired hand doesn't necessarily mean you're on just a salary, while you may be in many cases you can receive both a salary and a percentage of the profits. In most cases however it is employment at will,meaning you serve at the will and pleasure of the employer. In many cases this makes for a rather pleasant band atmosphere. (some how the knowledge that they could be terminated and out in the street tomorrow keeps the egos and peoples attitudes a lot healthier and motivation stronger, than if they have life tenure.
Hiring band members for a band just starting out is not really practical because there's no money to pay them a salary, so everyone works for a percentage of the future pie.
Assuming you're all going to be partners, how should the profits be shared? Well again there are no rules, and you can do it any way you like. The easy way and a common practice is to split things equally. (if there are five of you everyone gets one-fifth, or 20%).
While this is common in new bands it can grow into a real source of irritation if some band members work much harder and contribute a lot more than others. Another approach I have used for a band I work with was the two members who founded the band and had played together before in other bands, as well as wrote much of the bands material were given bigger percentages than the other band members, and frankly, even when everyone has been together from the beginning there may be one or two key band members who are the heart of the group and deserve a higher percentage than the other members.
In addition, nothing says you have to use the same percentage for recordings, that you use in other areas. Sometimes bands split evenly on all concert monies, (theory being that all the band members are out there performing and sweating together) but have different splits for their recordings, merchandising, television performances, etc.
Some things for consideration:
How will band profits/debts be distributed? (Royalties, performance fees, etc.) Do some members receive/contribute more than others? Who will pay for what? Who will be keep track of band monies? What will happen when one band member contributes more time/money than expected? Will band members receive payment for projects completed and/or be responsible for debts incurred prior to leaving? (Does this change depending on whether the person leaves or is removed?) Does the band have to "buyout" the leaving member? ( more on this shortly)
CONTROL
Just as ownership of the partnership does not need to be equal, neither does control of the partnerships business decisions. Normally you would vote in proportion to your percentage of profits, but this is certainly not any law, nor is it carved in stone. So even if your partnership percentages are equal, one or two key members may control your vote - for example they may have two votes, where everybody else has only one vote. Or it could be setup so that the partnership can't act without at least one of the key members agreeing regardless of how many people want to do it. Once again the possibilities are endless, depending on your creativity and desires, but they need to be thought out very carefully, for example, try not to have an even number of votes, because this will allow a deadlock. (meaning a equally divided number of votes where nothing can be done) At worst you can a third party like your manager break the tie, but its better to try to have a mechanism to do it from inside the band.
Some other Issues
- Acquisition of Assets How will the band acquire gear/assets? (Instruments, PA system, lights, van, merchandise, web site/domain name, etc.) If the band breaks up how will these assets be divided ?
- Incurring Expenses
What kind of vote do you need to approve the groups spending money? Who opens and maintains the groups bank account? How many members must sign a check? Who maintains the groups books and provides financial accountability?
- Contributions
What kind of vote do you need to make the band members contribute to the partnership (translation: put in money the group needs) to buy equipment, transportation, merchandise, press kits, cover unexpected expenses, etc.?
- Business Decisions
How will band business decisions be made? (Hiring/firing lawyers, managers, agents, spending band money, signing with a record label, etc.) Majority vote? Unanimous vote? Veto power? Tie-breaker? How can the band agreement be changed?
- Creative Decisions
Who owns the songs we write? (Note: You may want to seek advice on copyright law prior to deciding this.) Who decides which songs to perform/record? How is it determined who gets songwriting credit? Who decides what gigs to play?
- Band Members
What happens when a new member is hired or an existing member leaves the band? How can band members be fired? Can a member quit at will? What if a member becomes disabled or dies? (This may be important so surviving spouses/parents are(n't) involved with the group's business.) What are the members' responsibilities, relationship, etc.? What is required of each member?
- Firing
What kind of a vote does it take to fire a band member? Majority? Unanimous of all other band members?
- Hiring
What kind of vote do you need to take in a new partner? Majority? Unanimous? My friend Tim came back from his vacation in Florida to find his band hired a new manager and keyboard player while he was away, he quit the band and two week later they broke up.
- Quitting
Are the band members all free to quit at will? What kind of notice must they provide?, do they have to remain until a suitable replacement can be found? As a band member you are not free to quit if your under a recording contract, and if your in the middle of a tour your not able to walk out on the concert promoters. However aside from contractual obligations, there's no way to force someone to continue working as a member of the band. But it is possible to stop him or her from working as a musical artist after quitting the band, or require the member to pay his or hers solo earnings to the partnership (meaning the other group members get a piece). There are real means to enforce such contract provisions.
Personally I believe its in the best interests of the band to just let an unhappy member go, and to try to maintain the best relationship possible as long as its not in the middle of a tour.
An unhappy band member will bring little to the band worthwhile, but one can never tell what the future will bring so try to part as friends.
- Corporate Entities
I touched a bit on this earlier.
Partnership – Partnerships are easier to set up, but expose you and your personal assets to liability. You may want to start as a partnership and convert to a corporation once things get going.
Corporation – Corporations are somewhat more expensive to set up, but provide more protection and shelter your personal assets. A Limited Liability Corporation (LLC) is basically a partnership that provides the limited liability of a corporation.
Note: This checklist provides some business and legal issues you should consider if you are engaging in activities in the music business. However, the list is not exhaustive, is not necessarily in any particular order, and not every item on this list is necessarily appropriate for your situation. Please consult with an attorney in your area who has music industry experience for advice regarding your particular needs and issues. You may also want to engage the services of a Certified Public Accountant (CPA) to help you with tax preparation and entity-related decisions.
Partnership – Partnerships are easier to set up, but expose you and your personal assets to liability. You may want to start as a partnership and convert to a corporation once things get going.
Corporation – Corporations are somewhat more expensive to set up, but provide more protection and shelter your personal assets. A Limited Liability Corporation (LLC) is basically a partnership that provides the limited liability of a corporation.
Note: This checklist provides some business and legal issues you should consider if you are engaging in activities in the music business. However, the list is not exhaustive, is not necessarily in any particular order, and not every item on this list is necessarily appropriate for your situation. Please consult with an attorney in your area who has music industry experience for advice regarding your particular needs and issues. You may also want to engage the services of a Certified Public Accountant (CPA) to help you with tax preparation and entity-related decisions.
- Amendment of Partnership Agreement
What kind of vote does it take to change or amend the terms of the partnership deal? For example, can a majority vote reduce your percentage? Or does it require your consent?
- Death or Disability
What happens in the event of the death or disability of a band member? One sure thing is that the remaining band members don't want the surviving family voting on partnership matters (not likely they will be singing on stage or recording with the band). For this reason there is normally a "buy-out" provision in the agreement and your treated as if you had quit the partnership or were terminated.
- Ex-Partners
What happens after you're are terminated as a partner or quit the band? Do you keep the same percentage level for past activities (almost always YES) For future activities (almost always NO)? Do you get brought out of your share of assets of the group (called a "BUY-OUT") and if so, at what price and over what period of time?
BUY-OUTS
So on the subject of buy-outs
- Price
The price of the buy-out equals the leaving partner's percentage of all "hard" assets owned by the partnership. "Hard" assets means goods that you can touch and feel (sound equipment, instruments, cash, etc.) as opposed to "intangibles" (such as the group name, recording contracts, television shows, etc.) So, if the bands assets are worth $100,000. and the partner had a 25% interest, his or her value of the assets would be $ 25,000. This is usually done on a "value" as opposed to "cost" basis, due to depreciation and the fact that used equipment is generally worth considerably less than the cost. It can also be done on the "Book Value" , which is an accounting concept meaning the "value" on the books of the partnership. Book Value is typically the original cost minus some scheduled factor of depreciation that is worked out by your accountant. Of these three methods, book value is likely to be the lowest, although it's possible the real value could be less. Cost is the least accurate measure of anything.
I feel personally that no value should be given to any intangible rights. First, I think they are difficult if not impossible to value, and second, any established value may be different after someone leaves the group. (for example, if the lead singer/songwriter goes, the group name and recording contract may become worthless.) Finally, I think the leaving band members contingent payout covers this.
- Cash Payout
The value of the hard assets is paid out over a period of two years at the rate of 25% every six months. So in the $25,000 example given means that $6,250 would be paid six months after the termination, $6,250 paid after 12 months and so forth. Because the money does not get paid all at once, the leaving band member gets interest on the unpaid balance.
The reason for structuring a pay-out over time is to protect the remaining band members from having to come up with a large amount of cash (which they may not have) all at once. Its not uncommon to provide that the terminated band member can look only to the assets of the partnership for his or her buy-out payments, which means the other individual partners aren't responsible if the partnership has no money to pay.
- Contingent Payout
The leaving member gets their continuing percentage from activities of the partnership from activities of the partnership prior to their leaving. This means royalties from recordings in which they participated, as well as monies from merchandise using their name or likeness, concerts in which they performed, television programs on which they appeared, etc. Bear in mind that there are special record contract provisions about leaving members, which may affect their continuing royalties. The leaving member does not get any portion of group earnings from activities after they leave.
Legal Ethics
You should be aware of a common ethical problem that groups have. A lawyer that represents a group and draws up a partnership agreement has a built in "conflict of interest." A conflict of interests or conflict means the lawyer represents two clients whose interests are adverse to each other. So if a lawyer represents the partnership, he or she can not take sides and represent anyone of you against any other of you. But this is what making a partnership agreement requires, because (unless everything gets divided evenly and goes by the simple majority vote) your best interests are not the same. For example,if extra percentages of money or control are going to the lead singer and songwriter they must come from the others in the group, whose best interests are to keep them. This happens every day and all ethical lawyers or personal managers will advise you of the conflicts existence.
You can do one of two things:
1) Each member can get independent counsel (which may or may not be affordable, and can get expensive, it may be destructive and take a long time if anyone decides to be a hero) It is however the best way to do this.
2) Far more commonly, the manager or lawyer explains all the issues to the group openly, and then lets you decide among yourselves, how you want to resolve them. In this case the manager or lawyer does not represent any of you, but rather just acts as a neural party, drafting whatever agreement the band members reach among themselves. if you proceed with this route, your manager or lawyer you will ask you to sign a conflict waiver, which says
he or she has explained the conflict to each of you and you chose to precede anyway.
DISCLAIMER: This information is offered as an educational and informational tool only, and should not be relied on as legal advice. Applicability of the principles discussed may differ substantially in individuals situations. If you need specific legal advise you should consult an attorney.
No comments:
Post a Comment