I have often been asked to prepare deals between investors and artists. These are not complicated limited partnership deals, but rather basic agreements between individuals. When the arrangements work they can be beneficial to all parties involved. When they do not, they can be a nightmare for everyone. The funds offered are usually from a family member who wants to support an artist’s career, or from a successful business person who wants to diversify into the entertainment field (of course, given the current recession, you don’t see as many of these types of investments). The latter example sounds intriguing, but it can be dangerous unless everyone involved understands the risks.
Many people, although savvy in their own professions, do not understand the financial intricacies and huge inherent risks in the music business. Additionally, many people lack the patience it takes to see a return on music business investments. Frankly, the best investors are family members who do not mind risking their extra money to help a deserving artist.
From an artist’s perspective, the most important aspect of structuring the investment agreement is to specify the sources of all the returns and to limit it to just the specific areas upon which the parties have agreed. Will the investor be paid on record sales, live performance income, merchandise, music publishing, etc.? How does this relate to existing or future contracts? The other important aspects are to specify the duration of both the term of the agreement and the period for which the artist must ensure the investor’s income participation and ensure that the agreement does not interfere with any potential agreement the artist may enter into.
There are great Nashville stories about artists, who, in their early career, gave away more than 100% of themselves. While these cases can be amusing, they can lead to litigation, which is, of course, not so amusing.
In sum, both the artist and the investor must have a very clear understanding of the risks and obligations of such an arrangement