Monday, May 18, 2009

What Rate of Return Should You Offer Your Indie Film Investors?

Investing in a film is risky business but it can yield high returns if the film is a success. And it's the rate of return that is most important to investors. They invest to create wealth and they are taking a chance on your film to help them do just that.

So what do you offer investors in order to entice them to put money into your film?

The standard rates of return are anywhere from 110% to 125%. This means, should your film make enough money to pay your investors back, they can expect 100% recoupment of their investment plus an interest of 10 to 25 percent (depending on your offer). Of course, you can go lower or higher. It's up to the filmmakers to set the rate of return.

Why these figures? Well, you want to be competitive with other investment vehicles. Over time, the stock market has shown a rate of return of 10% over the long term. So 110% has you on par with the stock market. 

So why wouldn't investors just invest in the stock market -- even though the stock market is reeling right now, history tells us it will bounce back eventually? 

Good question. Well, investors like to diversify and investing in film may help them to diversify their portfolio nicely. Or maybe they love movies and this is a way for them to be involved in filmmaking. Whatever their reason, a competitive rate of return can help an investor take a chance on your film.

Also, if you have a film that is riskier than others then you may want to go with a higher rate of return in order to make your film more attractive to investors. I have offered 25% a few times because I knew the film was a riskier investment. 

What makes a riskier film?

1) First-time director 
2) First-time producer
3) Difficult subject matter
4) Niche audience project
5) No name actors
6) High budget required

There are many other factors that could make your film riskier than others. You need to weigh that risk and also the difficulty of finding investors and decide what kind of return you want to provide, accordingly.

Now what about profits? How do you split profits? 

The standard split of profits is 50% to Producers and 50% to Investors. Producers can take their 50% of the profits (otherwise known as Back End) and give it out to people like the cast or crew or even vendors in order to attract them to work on their projects. Normally, you do not touch the investor profits when giving out Back End. The Investor 50% remains with investors members only.

For example, you might pay Joe Actor $20,000 in pay upfront but also offer him 2% of the Producer Net Profits. 

In addition to offering returns of money, you can also offer credits (like Executive Producer) if an investor brings a significant percentage of the budget to the project. 

Just remember, a return from a film investment should never be guaranteed. And you must be extremely clear about that from the start. Shout it from the mountaintops if you have to -- just don't mislead your investors. Investing in film is risky and recoupment and a return is not guaranteed. 

The day you can pay your investors back is very exciting for everyone (not just the investors). This means your film was a success. And it usually means you get to make more films and have an easier time finding the money. So make a great film and get that money back so you can keep making more and help indie film survive. We need you to be a success!

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