What is an Option Agreement?
In the film industry, an option agreement is an agreement between a producer and an author of a book, play, article, or screenplay. A well-drafted option agreement is actually comprised of two different agreements: (1) the option agreement, which gives the producer the right to develop and “shop” the screenplay to any number of networks or investors (usually defined in the agreement as “buyers”) for a relatively low price but for a limited period of time; and (2) the right of the producer to actually purchase the rights (i.e., purchase the copyright) in the screenplay for a price that’s pre-negotiated in the option agreement before the option period expires and usually once the producer finds a willing buyer.
The option agreement can be beneficial to both parties. From the producer’s perspective, they can “lease” the work for relatively cheap without committing to buying it. From the writer’s perspective, they can make a little bit of money leasing the work, but if the producer can’t locate a buyer within the option period, then the rights revert back to the writer, and the writer can then lease or sell the rights to someone else.
Who benefits the most from any given option agreement is determined by the details of the agreement itself. What terms you should expect, either as a producer or writer, will vary wildly based on a variety of factors too lengthy and situation-specific to delve into here.
Four Frequently Asked Questions About Option Agreements
1. What does the “exclusive right to purchase” mean?
When a producer and writer enter into an option agreement, the producer isn’t purchasing any actual rights to the work. Instead, the producer is purchasing the exclusive right to purchase the work at some point in the future. If the producer successfully locates a buyer, then the producer can buy the rights to the screenplay, but if no such buyer materializes during the option term, then the writer gets to keep all the rights. The exclusive right to purchase also means that while the option period is in effect, the writer can’t option or sell the work to another producer or develop the work in any way.
Note that some writers, especially writers with clout, may try to negotiate what sorts of people or entities qualify as acceptable “buyers.” The option agreement may also allow the producer to make a feature film only, but not a television series. Or, the producer may obtain broad rights to do whatever he or she wants to with the work, so long as the pre-negotiated purchase price is paid with respect to each potential exploitation.
2. How long is the option period?
Usually the initial period for an option agreement is around 12-18 months, but it can be longer or shorter depending on what the producer and writer agree upon while negotiating the terms of the option agreement. After the agreed upon period ends, the producer loses the exclusive right to buy the work and the writer can then option or sell the screenplay to a different producer. Sometimes the option agreement will include some pre-negotiated extensions of the option period, for an additional six or twelve months typically, for another pre-negotiated price, if the producer needs just a little bit more time to develop the work and locate buyers but doesn’t yet want to commit to actually purchasing the rights.
Note that, as a general rule, options are bad for the person against whom they are applied, which in this case would be the writer, so writers should try to limit the number of options available and add additional payments for each of them if the producer insist upon them.
So, what’s fair? From the writer’s perspective, you want to give the producer enough time to make some initial investment in locating a buyer, potential developing the screenplay, attaching talent or a director, but not so much time that your rights are going to be held up if the producer either isn’t doing anything to develop the property or doesn’t have the connections to get the film made, or both. From the producer’s perspective, clearly you want to get as many rights as you can for the lowest price and for the longest period of time.
3. What’s a good option payment?
An option payment is the amount of money that the writer will receive for giving the producer the exclusive right to purchase the screenplay for a set period of time. The amount of an option payment varies wildly depending on certain factors like:
- the success of the writer’s prior works;
- the potential budget of the film; and
- what the producer is able to afford.
Typically, an option payment isn’t a ton of money, but, again, this is a term that should be negotiated when the agreement is being made. A general rule of thumb that I’ve seen ignored many times (sometimes with good reason), is that the option price should be between 5% and 10% of the pre-negotiated purchase price. If the purchase price is $150,000, then the option price might be between $7,500 and $15,000. But in an indie deal or where you have a relatively novice screenwriter and relatively novice producer, you might see either no option payment at all or a payment of a few hundred dollars. Remember that as the writer, you can always so no to the arrangement, or if you do agree to provide an option for less than what you think the producer should be paying, then you can mitigate your risk by negotiating a shorter term.
Both parties should also be aware whether the payments for the option and extensions of the option are applicable against the purchase price, i.e., whether a $15,000 option payment reduces the $150,000 purchase price by $15,000.
4. What’s a reasonable purchase price?
Typically when a buyer is located, the producer will exercise his or her right to actually purchase the rights to the work. Sometimes the purchase price is calculated on a sliding scale as a percentage of the budget, meaning that as the budget of the film increases during production the purchase price will also increase, maybe with some minimums and maximums built-in. The purchase price should be negotiated upfront and put into the option agreement so that the producer and writer are in agreement when it comes time for the producer to acquire the work outright. Although, of course, it’s better for writers if the producer fails to pre-negotiate a purchase price in the option agreement, because it then gives the writer the ability to negotiate for a higher price than perhaps they would have agreed to before any buyers got involved.
Of course, the above only addresses some of the most basic questions about option agreements. A full-length option agreement may be a dozen pages or more. You should also know about reserved rights and turnaround rights, what happens if there’s sequel or prequel or another type of production, whether there’s any backend participation or contingent compensation, how crediting will work, and whether the writer is obligated to provide any other services, like consulting on set, and if so, then whether the writer will be paid for providing such services.
Are you a writer or a film producer and have questions about entering an option agreement? Feel free to reach out to us with any questions.