Leverage
Nine out of ten times the music business works like this for new artists with no traction: you either start by distributing your music for free via an online distributor (without much administrative and financial support) and spend all your money and time building your business until you can sign a deal where you own your creative and intellectual property rights, or you sign away (for a period of time) all your rights either through a production deal or a recording deal with a major recording label.
Yeah, there are exceptions. I’ve negotiated some, but these are far and few between… and sometimes result in burned bridges.
It’s only over the last few years that “independence” in the music business has become a trending topic, and it’s kind of weird tbh..
“Wasn’t nobody ‘round when I was independent”
Baby Keem, ‘Family Ties’
In any other industry, “independence” is the norm.. and just because you sign contracts with a third-party vendor or service provider doesn’t mean you aren’t independent.
The United States has 14 trade agreements with 20 countries; but is still considered independent. And even if we talk about artists like the late, great, Nipsey Hussle - his independent movement wasn’t championed until he passed away; but that’s another story..
This creates an issue because often by the time an artist who has signed a tough deal blows up (if they blow up) they’ve contracted away crucial rights and are dependent on the label or production company to renegotiate. That’s never a position you want to be in if you can help it.
I wrote here about the difficulties involved in navigating the music business so I’ll spare you the boring details, but here’s some commentary on the music business from a few artists:
“Contract all f*d up
I guess that means you all f*d up
You signed to one ni**a that signed to another ni**a
That's signed to three ni**as, now that's bad luck
Damn that sh*t even the odds now
You better off selling this hard now
You call it living out your dreams
You can't fly without your wings”Pusha T, Exodus 23:1
“I own my own masters
You know I ain't missing no royalty statements
I can't be rated (God, God), damn Hov stunt on them haters
Sorry Mr. Drizzy for so much art talk
Silly me rapping 'bout s**t that I really bought
While these rappers rap about guns they ain't shot
And a bunch of other silly s**t that they ain't got
I'm on my Lupita Nyong'o
Stunting on stage, after 12 Years A Slave
This Ace of Spades look like an Oscar
Black tux, look like a mobster”Jay Z, ‘Ni**a We Made It’
“That paper it get funny when publishing is involved
Mechanicals never mattered because that was your dog
Now you hands-on, but things don't ever seem right
You make a call to give your lawyer the green-light
He look into it then hit you up with the bad news
It's so familiar, he did the same with the last dudes
Mafioso, baby girl, cash rulesEvery dollar accounted for, double M the crew”
Rick Ross, ‘Foreclosures’
Why does it work like this? Well, for one, as I mentioned in Part I very few artists become superstars. And so the mentality of record labels and production companies is “we’re taking a risk on you, and if you succeed, we should participate in the rewards”.
But until when is the question?
Yes, it works out sometimes for some artists who either play out record deals where they’ve contracted away ownership of 3 to 5 albums, for as much as ten years, and leave without owning their previous masters (sound recording copyrights) or sometimes buy back ownership of those records.. but if we can develop different models then we can can change the game and push the culture forward (which to me is about economic empowerment).
As I’ve previously written, other industries that have similar success rates and probabilities have developed alternative models to make up for these inequities.
“Let's think about this for a second
Tell me what you would do for aesthetic
Would you sell your soul on credit?
Would you sell your bro for leverage?
Where the hypocrites at?Kendrick Lamar, ‘N95’
Before I get into this part, let me just say that there are different types of record deals. I’ve written about this before so I won’t get into it, but we’re seeing the rise of alternative financing companies that will essentially loan an artist money in exchange for a preset interest rate - backed by algorithmic software that assesses the earning potential of an artist’s catalog, but these are usually for artists who already have significant catalog revenue - and you typically can’t get loaned more than your catalog is currently producing.
Ok, now let’s talk about one kind of deal in the music business.. the production deal.
A production deal is basically where an artist signs to a company that will “develop” that artist. In contractual structure, the deal looks similar to a major label deal. The artist may give up rights to the trademark of their performance name, ownership of their masters, and agree to exclusively record for that company for anywhere from 3 to 5 albums. In exchange, they may get an advance.
The production company often doesn’t have the infrastructure and finances to market that artist on the scale of a major label - and so, in turn, they will seek to assign that artist’s contract to the major label. Now, the artist is signed to the production company and the major label.
Remember the Pusha T verse?
I’ll let you draw your own conclusions, but there are different ways of looking at this structure, but it usually comes down to (i) was everyone “loyal”, (ii) did the artist become a superstar, and (iii) did everyone get rich?
VENTING IN THE SAFE HOUSE
Oftentimes, it doesn’t work (for reasons I’m sure you can understand); and so I’m here to propose an alternative model for artist development and financing. I got this idea from the SAFE, an agreement used in Silicon Valley circles. SAFE stands for Simple Agreement for Future Equity, and it was created by Carolynn Levy, a lawyer for ‘Y Combinator’, one of the foremost start-up accelerators. for You can read more about it here.
SAFEs are often used for pre-seed companies but can be used across the board. They generally work like this: investors invest in a startup, but don’t immediately take equity; they only get equity when the company raises a seed or Series A (or B; etc.) round.
Here’s a bit more background - “In 2013, Startup accelerator Y Combinator first released SAFEs as an alternative to convertible notes, which are more investor-friendly in some respects. At the time the industry was flush with cash and founders found themselves with an unusual amount of bargaining power over financing terms. Instead of being bogged down with the negotiated terms of a Note, the idea was to create a short agreement that companies and investors could use that stripped away the debt-like features of convertible notes such as a maturity date and accruing interest, thereby simplifying early-stage financings for startups.”
Basically, when these agreements are used, the thinking is “we see the value and want to help you get off the ground; we won’t take up space on your cap table now; but if your idea pans out then (and only then) will we get equity”.
To get a bit more specific, deal terms in a SAFE might look like this -
Equity Financing. “If there is an Equity Financing before the termination of this Safe, on the initial closing of such Equity Financing, this Safe will automatically convert into the number of shares of Safe Preferred Stock equal to the Purchase Amount divided by the Conversion Price”
In common English - the SAFE investors are not immediately getting equity, but once the company raises a proper investment round, the investors will acquire equity (subject to a few details, not important for the purposes of this article).
Liquidation Priority. “In a Liquidity Event or Dissolution Event, this Safe is intended to operate like standard non-participating Preferred Stock. The Investor’s right to receive its Cash-Out Amount is: (i) Junior to payment of outstanding indebtedness and creditor claims; (ii) On par with payments for other Safes and/or Preferred Stock; and (iii) Senior to payments for Common Stock”.
Again, in common English, this clause provides for the order of payment should the company be acquired, go public, or be dissolved. It creates strict terms for who gets what and when.
So what’s the point?
The point is that, unlike, many traditional music business deals (like a production agreement), no immediate IP or ownership rights are being granted. The founders are getting cash, but still have the flexibility to sort out their cap table (company ownership). This creates space and time for them to figure things out.
Space and time cannot be understated.
On the other hand, in the music business, new artists often immediately give up revenue and ownership percentages to managers, production companies, distribution companies, and even labels. By the time you add it up, an artist may only be receiving 30 - 40% of all income; and all this could be on annual gross revenues of < $100k.
It’s kinda hard to navigate on those terms.
So what if we could create a cap table for artists?
I’ve had conversations like this in deal negotiations, and often people who invest in music want to maximize their benefits. Many times its pure greed; sometimes they just don’t understand how the business works; other times, if they’re making a loan, they’d rather just put it in an index fund. I get it.
But what if we could invest in an artist and set terms that if the artist signs a deal, the investor will receive a percentage or equity in the masters or publishing until they received 3x on their money (alternatively the artist could buy out this right).
So I invest $100k and if you sign a deal with a label - that deal has to be a licensing deal where the label gets 30%, I get 20% of the master and 20% of publishing until I get $300k back, a return of 300%.
Or I say, I own the master on the first or first two albums released under a major label deal that has at least $100k to $500k budgeted for marketing.
Or, I and my partners put up $500k to $2m for the production and marketing of an established artist’s album, and, in exchange, we get 20 to 30% of your touring income for the next domestic or international tour (perhaps we cap our take).
CHANGES
There are different ways to slice it, and at some points, it could look like a traditional production deal; but the difference is the artist has flexibility.. also, this occurs outside of the traditional music industry infrastructure.
The main benefit for artists is that they have the freedom to spend the money how they want, develop, sign other deals, grow, and return the money when the time is right.
I think the music industry needs a serious infusion of innovation in its’ deal structures. But to be clear, there’s (sometimes) a difference between tech founders and recording artists. When it comes to SAFE investments in startup founders, these are investments being made in skilled and traditionally educated founders so it makes sense why these investors would be willing to take this chance; so artists (or investors) who would even think this is an option in the music business need to have (or see) potential, a plan, a roadmap, and controls.
Perhaps, this structure in the music industry also requires an “accelerator” type of infrastructure where artists are provided with legal and financial counsel, music recording space, and other resources to better enable them to succeed.
That said, this isn’t a perfect structure. It won’t work for everyone. It requires the right artist and investor, but it’s time to think differently. I’m just brainstorming.. and I’m open to any feedback, commentary, or criticism - shout me a holler dun.
In the meantime, let’s keep it moving.. oh, and if you’re an artist and anyone ever asks you “why do you want to own your masters?”, tell them “because it’s like real estate”.
Elijah Adefope is a media, entertainment, and technology consultant and attorney. He is Lead Counsel at Substack, a media technology platform for creatives, and has written two books on the music and sports industries. He lives in Atlanta, Georgia and can be reached on LinkedIn.