Production Finance

This is the holy grail of filmmaking.  MONEY.

Outside of having a studio deal, there are only three ways to finance a film:  Private equity, debt or some combination of the two.  But wait, you say, there are all sorts of new models out there.  Well, yes there are.  Web 3.0 is creating all sorts of ways to get a movie made, but regardless, having a sound understanding of how motion pictures are funded in the "Old School" way is extremely important.

We will put a pin in the discussion of financing in the new era for now.  At this point in time, the majority of films are financed using traditional methods.

EQUITY:

Equity, as I said in a previous post, can involve securities.  Depending on how many people you are asking to invest, you will need to know what the rules are in your state or country.  Some states will allow you to ask a dozen or so people to become members in an LLC or partners in an LP without registering as a security.

Before you ask anyone to invest, get a business plan together, put together your marketing materials and marketing plan and then get a lawyer to create the investment vehicle - whether an LLC or LP or a C Corp if you are planning on selling securities.

I like LLC's but that is just my preference.  I personally like to have a litigation attorney who has a corporate law partner set it up and have them caution me relentlessly about the securities rules so that I don't violate them.

Equity involves risk to all parties that are involved.  I am not giving you legal advice here, so don't just go by what I am saying.  HIRE A LAWYER!  This is not a game.  Make sure you know what you are doing.  You can get in trouble.

Whether you are asking your rich uncle to put up all the money or creating securities to sell to the general public, you still need a legal entity to be created and maintained.

Let's say you have all of the elements necessary in place to solicit investments.  How much do you ask for?  Well, how much do you need to make the film and operate the entity for three to five years?  Don't get crazy, but once you make the movie, you will have revenues coming in and out of that entity for at least several years unless you sell it outright to someone.  You will need to file taxes annually and there is a cost to this.  You will also need a bank account (cost there too).  Accountant - costs...you get the picture.

What does the investor get?  I am not going to touch this subject in specifics.  That is between you and the investor.  There are many schools of thought on this.  In my view, the investor should be paid back first out of revenues since you will presumably take a fee during production and some sort of maintenance fee for managing the entity for the foreseeable future.  And what exactly do I mean by revenues?  Money going into the entity - in other words, net of distribution fees and marketing expenses.

DEBT:

Many films are financed just like a house is financed - though a bank.  You provide the bank with collateral that is acceptable to them and they will loan you the money.  Many banks in the industry will take pre-sales as collateral.  With credit tight these days, you may need collateral and equity of some amount to get a deal done.

With debt financing you need to make sure that you consider the cost on the money when determining your budget.  If you borrow $1 million, what will that cost when you add in the interest charge?  Lets say it ends up being $1.3 million.  Can you get back that much from the marketplace in the time given to pay off the loan?  If not, you may lose your film to the bank just like when someone loses their house in foreclosure.

HYBRID:

As I mentioned, you can do deals with a mix  of equity and debt.  The machinations of what these deals look like are endless.  For example, I did a deal where investors in another country bought tax credits valued at 100% of their investment and were allowed to get back over half of their investment penalty free provided they had a guarantee in the form of a letter of credit.  They would essentially front the money for the entire budget.  So I got the L/C, which I collateralized using sales that a production lender accepted.  The lender also gave me a gap.

A simpler version would be something like your uncle Tom invests 20% of the budget, you sell the movie to a studio in the US for 35% and you get tax credits from the state of Michigan for 40%.  Your sales agent says that foreign is worth 100% of your budget and based on all of this, the bank lends you the money to make the movie in anticipation of collecting the tax credits and the US sale.

This discussion, again, is not meant to give legal advice.  It only touches the tip of the iceberg.  Since this is a blog meant to spark discussions, this should be seen as a starting point.