Put yourself in an investor's position. It doesn't matter if your potential investors are friends, family members, or people one step further removed (though with development, it should ideally be no more than four or five investors, and they should be people you know): They are going to carefully consider what they are being asked to do. And what you are asking of them is to invest money several months prior to, and outside the reality of, your project. Their five or ten thousand doesn't guarantee that you will get the film off the ground, merely that you will be brought up to the point of asking for money to produce it. In other words, they're taking a longer risk than the actual investors in the film, and a bigger risk as well: they stand to lose all their money if the film's budget never materializes, something the investors in the film truthfully don't face. Oh yes, they can lose their money, too, but the chances are they'll have a film to show for it, an investment that, down the road, could still yield earnings. How do you justify to a potential development investor the transfer of cash from his or her pocket to yours, with the distinct possibility of nothing to show for it?
Surprisingly, I've always found it easier to raise development money than the actual budget of the film. So, there must be something compelling about this kind of investment. And indeed there is. Let me go through the development fund-raising pitch from the beginning, and you'll see how it gathers momentum and finally becomes an investment opportunity that is hard to resist.
PRODUCER: So, Nicole, how'd you like to invest five thousand into the development of our new project? POTENTIAL DEVELOPMENT INVESTOR: Well, I need to hear more about it . . . but why are you calling me Nicole? P: Oh, that's just for the purposes of this chapter on development. You could be anyone.
PDI: Okay. Well then, about the money. I'm not doing great this year, but maybe I could afford a few thousand . . . but, uh, you explained what development is, but why would I want to invest in your new film so early? Why don't I just jump in when you're closer to getting it off the ground? P: Well, that's a good point. You could. But I need this capital to get to the next plateau, and there are incentives for being a development investor. For instance, if we use the tired but classic metaphor that the entire earning power of the film, 100 percent of the film, is a pie, with 50 percent generally going to the investors and the other 50 percent going to the producer, and we say—just for the purposes of this example—that the budget is a half-million dollars, if you do the math, then each investor percent is worth ten thousand dollars. What the producer does with the other 50 percent of the pie is up to him, but it's his job to hang onto as much of that percentage as he can. Some of it may go to a lawyer, some may go to the director, or the screenwriter, or a name actor, or a name cinematographer, or for an otherwise unaffordable location . . . whatever. When he's given away whatever he's had to, what's left of that 50 percent is the producer's.
The development investors' percentage also comes from the producer's 50 percent, not from the 50 percent that represents the investors' half-million. So . . . we've said that for the investors in the film's budget, $10,000 would buy one percent of the film. Right?
P: However, as a development investor, and not an investor in the budget of the film, your investment would be made equal to twice the percentage that an investor in the film's budget would get for the same amount of money . . . which is only fair, since you're taking a longer shot.
PDI: So, for five thousand, I'd get 1 percent of the producer's share, whereas the other investors would have to pay ten thousand for one percent of the investors' 50 percent.
P: Yes, and what's more, that money—your $5000—would show up as an expense item in the film's final budget . . . as "Development Expenses" ... so that when the budget is raised—the half-million—you would get your money back immediately, off the top, in preproduction, and still retain the one percent you were given from the producer's piece of the pie. You would no longer be at risk financially, and you would stand to share proportionately more than the other investors in the film's profits.
PDI: Gotcha. Interesting. Now, when money starts coming in, do I get money from my 1 percent at the same time that the other investors do?
P: Well, no, because you've already made all your money back. So it's only fair that they be allowed to make all their money back first. Then everyone shares equally—you, me, and the investors. And there may be a few deferred amounts, for a name actor for example, that come even before the investors, but right now, there aren't any.
PDI: Okay. So if it takes you six months to raise the budget, using what I invested separately with you to enable you to get that far, if it takes you six months, at that point I get paid back off the top, and the other investors have to wait until the film comes out.
P: More or less. There could be a distribution deal that gives a large enough advance to get them clear, but yes, that's the general idea. You get twice as much as they do in terms of profit participation, and, if we raise the capital to shoot the film, you get your money back immediately, and they have to wait out the production, postproduction, the film festivals, and marketing conventions and distributor screenings, the period of time it takes from having made a distribution deal to the time the film plays . . .
PDI: How much longer would that be?
P: Could be as long as a year. Could be longer if we self-distribute, which is becoming more and more of a reality these days, with digital video and all the cable outlets. If you look at it that way, you may actually be waiting a shorter period of time to get your money back than they will, even though you've invested several months earlier than they have.
PDI: Yeah, but . . . I see why it's a good deal, for me . . . to invest in development. But it's a long wait, and I might be able to better use that money in the meantime.
P: Well, it's not that long a wait, since you'll be getting it back off the top from the budget.
PDI: I understand. But you might never raise the money to make the film, and you'd have spent all the money I gave you trying.
Okay. Now that's a relatively common perch to have jostled a potential development investor on to. She's up on the fence. She's teetering. I can feel her slipping off into my arms with that check. There's grease on that fence. But she needs one more little tweak, one more piece of good, legitimate bait dangled in front of her to do the job.
And the great thing is, you've had that final chess move in your pocket all this time. But you've saved it, waiting to see if your potential investor needed the whammy. And if she didn't, if she forked over the cabbage without it, then you give it to her anyway, because she's got to know, and she's gonna be very happy to hear it. . . but this way you're actually letting her set herself up for the denouement. All roads lead to this final piece of information, and it's the one that makes the development money yours:
P: . . . and that's a good point. Which leads us to the area of tax writeoffs.
PDI: Can film investments be written off?
P: Actually, no. And of all people, it was Reagan who saw to that. Before his administration, there were fairly seductive tax incentives, but he knew, being a film person, that if a film earns 10 percent of its money back in the first year, it can still keep earning for the next twenty years. So, you can't write off the other 90 percent. There is a small tax write-off, but it's not enough for me to use it as a major incentive in raising money. PDI: [staring, waiting . . . ]
P: However, a development investment can be written off entirely. PDI: Really?
P: Yes, because of the nature of the investment. Think about it: If, after a while, I've raised the budget, you get your 100 percent back immediately. If, on the other hand, a reasonable amount of time passes, say two years, and I haven't been able to raise enough money to produce the film, I will inform you and, at your request, send you a letter declaring that your money is a complete loss, and then you can write off 100 percent of your investment. PDI: That's really great. Does it have to be in two years? P: No. In two years I'll inform you that the film isn't going to happen—god forbid—and you can tell me to wait with the letter for a later year, when you've earned a lot and need a good deduction to balance it. One investor had me wait six years before requesting the letter. And it still worked. PDI: So, give me this again . . .
P: So, either you make it all back in several months and stand to profit without risk, or, down the road, you get to use 100 percent of your development investment as a tax write-off. It's actually a no-lose situation. Obviously you'd like the film to make money for you, but at least, either way, you do okay. And that's only the case with development money. [Pause.] PDI: Okay. I'll do it.
P: You'd have to be out of your fucking mind not to!
Sorry; scratch that last outburst. That was just me thinking.
There are other ways to sweeten the deal. You could offer the potential development investors double their money back out of the budget, or you could structure it as a bonus in a first position after the investors have recouped their monies.
A development agreement is brief and to the point. It protects you, but it reads like a loan rather than an investment in a corporate entity, and, in fact, that's really much closer to the truth, a kind of a loan between the investor and yourself. Here's one version of a development agreement for you to peruse, bearing in mind that a lawyer should be consulted if you plan to adapt it to your own purposes, because in some states it might violate security laws.
NAME & ADDRESS OF PERSON SEEKING DEVELOPMENT MONEY
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