One form of agreement that clients regularly ask me to negotiate, and that clients regularly ask me to draft, is what’s known as a production agreement, also called a production deal. Production agreements are especially popular in the rap, hip-hop, and pop genres, although they may appear elsewhere as well. They should be entered into, and offered, with caution.
What is a Production Agreement?
In its classic form, a production agreement is an agreement in which a production company, usually comprised of one or a few individuals, obtains the exclusive right to produce a number of demos for an artist, and then uses those demos to shop the artist to its connections in the music industry, in the hopes of securing a distribution agreement with a major record label or distributor for the exclusive recording services of the artist.
Although the particulars can vary from deal to deal, production agreements typically last somewhere between one year and 18 months. If during that time the production company fails to secure a distribution agreement, then the production agreement expires and both parties walk away. But, if a distribution agreement is secured, then the production company serves as the middleman between the distributor and the artist, taking as much as 50% of whatever money to which the artist is entitled under the distribution agreement, after first reimbursing itself for the expenses that it incurred producing demos and shopping the artist.
Possible Production Agreement Math 101
Let’s say an artist signs a production agreement with a company that has resources at its disposal and legitimate industry connections, and the production company is successful in attracting the interest of a major label, which wants to sign the artist to a six-album exclusive recording agreement with a $50,000 in-pocket advance; $150,000 recording budget, of which $120,000 is used for actual recording expenses and the rest is retained by the artist; and 15% all-in artist royalty, which, after accounting for an outside producer, is a 12% artist royalty.
Under the above scenario, if the artist signed directly with the record label, then he or she would receive the full $50,000 in-pocket advance, $30,000 recording budget surplus, and 12% artist royalty. However, if the artist signed the same deal, but through a production company, then the production company would first reimburse itself for its expenses, which could easily be $50,000 or more (especially if the production company decides that its production services are worth, say, $15,000 per demo), and then pay itself 50% of the remainder, leaving the artist with $15,000 from the original $80,000 pot, and a 6% artist royalty, unless the production agreement stipulates – as many do – that the outside producer fee is to be paid solely from the artist’s share of royalties, in which case the production company would receive a 7.5% artist royalty and the artist a 4.5% artist royalty. This arrangement typically lasts for the life of the distribution agreement, which for a six-album major label deal could be 10-12 years.
Yes, these numbers are stark, but it could get worse for the artist if the production company also participates in publishing and other ancillary revenue streams such as live performance and merchandise revenues. Any participation on the part of the production company is likely to be in addition to the participation of the distributor in those same streams, meaning that it would not be out of the realm of possibility for an artist to pay 20% of gross live performance revenues to a production company, 20% to the distributor, and 20% to a manager, if the artist has a manager, leaving the artist with a mere 40% out of which expenses must be paid. Any participation on the part of the production company in publishing is likely to be on top of what they are already receiving if the production company is providing the tracks for the demos.
Why Sign a Production Agreement?
So, why sign a production agreement at all? Clearly the production agreement is not ideal for the artist – the better scenario would be the artist signing directly with a major label, thus cutting out the middleman entirely. On the other hand, many artists lack the resources and connections to generate interest in their music. Additionally, major labels these days aren’t nearly as interested in developing talent. Production companies have risen to fill this void by devoting resources towards artist development, and then presenting to the major labels a more fully formed product. A production company with resources at its disposal (recording studio, funds, etc.) and legitimate connections in the industry can help propel an artist to that next level, and in doing so the production company should absolutely receive more compensation than its typical producer royalty; how much more, though, should be carefully negotiated, keeping in mind the figures and considerations discussed above, and taking into account the relative risk that each party is taking on by entering into the production agreement.
Production Agreements v. Exclusive Recording Agreements v. Shopping Agreements
There are many variations to the classic production agreement and this post can’t possibly discuss them all. But one scenario that I do want to discuss is where the production company is not only producing demos to shop to distributors, but is also reserving the right to release the music itself pursuant to a multi-album record deal. Before signing any such deal – and note that these deals may also simply be called exclusive recording agreements even though they are by their nature still production agreements – artists should look into whether the production company is set up to function as a record label. Does it have legitimate physical and digital distribution? Does it have the infrastructure and wherewithal to promote releases and provide accurate accounting statements? If you are being asked to sign what amounts to a production agreement with a multi-album record deal appended to it, then you should make sure that the agreement has all of the same terms and protections for the artist, e.g., guaranteed release clause, that exclusive recording agreements should have in them.
If you are offered a production agreement by a production company, or are considering offering a production agreement to an artist, then consider whether a shopping agreement, also called a finder’s fee agreement, might be more appropriate. Whether a shopping agreement is more appropriate depends on whether the artist is producing his or her own tracks and the extent of the production company’s investment. The entity shopping the artist might receive anywhere from 10% to 20% of the money received by the artist from any deal, and that figure should reduce over time to reflect the fact that the entity shopping no longer has any role in the process as the deal progresses between the artist and the major label.
Obviously both parties should tread carefully before entering into a production agreement or an exclusive recording agreement with a production company. These deals can last a long time, so the relationship should be a good one and the terms should be fair to both parties, taking into the account the relative risks involved. An attorney can help an artist protect his or her assets and potential future earnings, as well as guide a production company towards an agreement that suitably protects its significant investment without overreaching and potentially curtailing the artist’s career (which would be bad for the production company).
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 Note that these terms should be carefully defined in the applicable production agreement. And yes, major record labels do still exist and do still sign artists, although it does seem a touch quaint to only discuss these deals in terms of major label deals. On the other hand, if all a production company is going to do is potentially secure a deal with an independent label or even self-release the music, then I’d question whether a production company is even necessary. Again, that is why it’s so important to adequately define “major record label” and/or “major distributor” in the applicable production agreement.
 The agreement may want to address what each party can do, if anything, with the demos that were created during the term of the production agreement; this helps to anticipate and hopefully avoid conflicts in the likely event that a major label deal is not obtained.
 15% of published price to dealer, or PPD, that is; this royalty could be lower, but is not likely to be higher for a new artist unless there is significant buzz surrounding the artist.
 Note, too, that neither the production company nor the artist begin to receive their royalty until the record label has recouped certain expenses.
 In other words, in many cases the production company is, at a minimum providing the “beat,” i.e., the musical work, in which case it is already receiving 50% of the publishing in each song. If the production company then also receives 50% of the artist’s publishing stake, then it would be receiving 75% of the total publishing in the song, and typically the production company would also be asking to exclusively administer the publishing as well, meaning that the artist would not be able to enter into a lucrative publishing deal of his or her own, and never have a say in any syncs or other placements of the song, as the production company would exclusively administer the publishing, and the major record label would exclusively administer the sound recording.
 Pay particular attention to how many total albums the production company is requesting in its deal. Obviously the artist will want to limit those, while the production company will try to obtain as many as it can in order to increase the amount of time in which it has to recoup its investment. I’ve seen anywhere from three to six albums in these kinds of deals, while some of the more egregious deals request three to six albums but then also reserve the right to add albums to the deal if a distribution agreement is obtained, whether it’s obtained after the first album or the fifth album. If obtained after the fifth, then the production company would have the right to release five albums itself and then sign its artist to a distribution agreement where the distributor may request an additional six albums, during which the production company would continue to receive its 50%.