keith calder

I’m a big fan of the website Quora (specifically a place for asking and answering questions, and generally a fantastic resource for information). I’ve been answering questions there this year, and I’ve decided to start cross-promoting some of my popular answers here on my personal blog.

QUORA QUESTION -  How much should I pay for film rights to a book?

The book is faction - an imaginative elaboration around a little-known historical event. What would a typical range be, and how is it paid (ie - say 10% deposit plus the rest when the film is made, or…?)

MY ANSWER

The traditional approach is to “option” the film rights in the intellectual property. The general definition of an option is that you are paying to have the exclusive option of purchasing the film rights at a future predetermined date for a specified price.

For example, you might pay $100 today to have the option to buy the film rights in 18-months for $200,000.

Here are some other wrinkles that occur in many option agreements.

1) Often the option price is “against” the purchase price, meaning that in our example above you would pay $100 to option the book and then $200,000 minus $100 to exercise the option and buy the film rights.

2) Many option agreements also include a right to automatically extend an option for a second or third period. For example, you might have a clause saying you can extend the option for a First Extension Period of 18 months by paying a First Extension Fee of $1000. And perhaps the First Extension Fee is not “against” the purchase price. This means that if you used up the Initial Option Period and extended for the First Extension Period, you would have the rights for 3-years. This idea of 3-years of accumulated rights is commonly seen, as many studios are unwilling to enter into development agreements on a project where the rights expire in fewer than 3-years. Option periods are usually extended automatically for “force majeure,” which generally means events that are outside the control of the parties but have an impact on the agreement. A common example would be a major labor strike within Hollywood, such as the WGA strike of a few years ago.

3) The purchase price doesn’t have to be a fixed amount. It could be defined as a percentage of the Budget (and then you would have to define what the “budget” means and what types of costs are excluded from the “budget” for the purposes of this calculation). These percentages can vary, but it’s common to see ranges from 1-5% The option generally has to be exercised at the earlier of the expiration of the Option Period or the commencement of Principal Photography.

4) If the purchase price is a percentage of the budget, it might have a “floor” and a “ceiling.” The “floor” protects that if the budget goes below a certain amount, the rights holder at least gets a “floor” minimum payment. The “ceiling” protects the buyer in case the budget becomes huge, it puts a cap on the amount of money that the rights-holder will receive up front. So perhaps we structure our example as being a $100 option for 18-months against 2.5% of the budget with a floor of $50,000 and a ceiling of $500,000. This means that if the film’s budget is less than $2m then the rights holder will receive $50,000; if the film’s budget is higher than $20m then the rights holder will receive $500,000; if the budget is between $2m and $20m then the rights holder will receive 2.5% of the budget.

5) The option agreement usually outlines what the rights holder’s backend participation will be in the project. This might be a Net proceeds participation, which would mean you need a Net proceed definition (in filmmaking, “profit” is a contractual term that is negotiated, and is not a true accounting term). It might be a series of additional payments made based on fixed benchmarks, such as achieving a certain Domestic Box Office gross or selling a certain number of DVDs.

6) The option agreement also usually outlines what happens to any derivative productions such as TV shows, sequels, remakes, and so on. These might be passive payments to the rights holder.

7) The option agreement has to specify which rights are being optioned, and which rights are being retained by the original rights holder. For example, what happens with merchandising? What happens with musical theater rights?

8) The option agreement also generally outlines the on-screen and advertising credit that the original rights holders will receive on the film. This is usually some version of a “based on” credit in the main titles of the film.

As you can tell, this is not a completely straightforward situation. You are dealing in intellectual property, and there are a lot of legal pitfalls that arise. If you don’t structure the agreement properly, there’s a chance that you aren’t actually getting the rights you need to make and release a feature film. For this reason, I highly recommend working with a legitimate attorney with experience in the film business. They will help you structure an option agreement that adequately protects you.

But to your original question… There isn’t really a set answer. You might pay $1 for an 18-month option, and promise 5% of the budget of the film if the film is ever made. Or you might just pay $10,000 now and purchase the film rights entirely. Or something else entirely. It’s about whatever the middle-ground is between what you are willing to pay and what the rights holder is willing to accept for you to control the film rights to that source material.