Previously in this series on how to start an independent record label, I sent out a few warnings about what is involved in running a label, made a few general comments on the best way to set one up and also talked about what in the industry is called A&Ring.

This post is about recording contracts and contracts in general.

First up though, if you are drafting or signing a contract it is better to get someone qualified to advise you on this. I am not a lawyer and so recommend you get one. In fact, you should not just get any lawyer but you should get one familiar with entertainment and copyright law. In this post I can only really talk in general terms, and anything written can't be taken as proper legal advice, just a rough guide.

When the subject of contracts comes up people (especially musicians) sometimes get a bit jittery: signing a bad contract can have many implications further down the track, and they can also involve a fair amount of detail, concentration and jargon to understand.

With this in mind it seems appropriate to also highlight some of the positive aspects of having a contract. In essence a contract is an agreement between two parties about how a business (and also personal) relationship will work. The advantage of having a contract is that it should make clear who is responsible for what, for how long and how much everyone gets paid. A fair contract should be good for everyone as it makes all of this clear. If things go really well everyone knows where they stand, and likewise if it all goes wrong. Often relationships (e.g. between labels and artists) break down because each party was making different assumptions about how things should proceed. A contract spells these things out and lessens the chances of these kinds of mis-communications.

In recent years, with all of the changes going on in the industry, the types of contracts that exist are becoming more diverse and flexible. With the decline in sales of physical product record labels have looked to try different things, such as the much talked about "360 deal" and so on. This makes it harder to summarise the different types of deal, but in any case here is a rough outline:

Distribution deal: this is the most straightforward type of deal. The label/artist does everything except get the music to retail, which is done by the distributor. In the case of physical distributors they get CD's/Vinyl into the shops and for digital distributors/aggregators they get them to digital stores (iTunes etc). In some cases a distributor might pay for physical manufacturing up front (P&D deal).

Licensing deal: this kind of deal is usually for a finished album that has already been recorded and paid for by the artist or someone other than the label. The label then licenses that recording for a period of time, for a particular territory and based on various agreed upon terms. With the rise in home recording studios this type of deal is increasingly common, and is also more often used by indie labels.

Recording deal: This kind of deal is where the label pays for everything right from the outset, including the recording of the album and the label owns the master recordings. It can also refer to a deal where the label hasn't paid for the recording up front but later pays to buy the master recording so effectively owns it.

Any recording contract needs to outline who the agreement is between, so should identify the label and the artist, and that the agreement is exclusive.

Some other aspects of a contract should cover:

The Term: this is how long the contract is to run. If you are doing a licensing deal it should be specified how long the license is to run for before the master recording rights revert to the artist. It should also specify how many albums the contract runs for. This can often be expressed as "options" meaning the label has first option on a subsequent album(s). A term can range from just a few years to forever (in perpetuity).

The Territory: this is what countries/territories the deal covers. It can range from New Zealand only right up to "The Universe". If a label is asking to sign an artist for a worldwide deal but they only have distribution and networks in New Zealand the artist is going to wisely ask why they should sign to you for the world. So, as a label you need to be realistic about what you can achieve for an artist in different territories.

The Money/Royalties: there are numerous ways royalties can be allocated. One common indie label contract structure is based on profit share. This is where profits are split (usually 50-50%) between the artist and the label after all the expenses of manufacturing, marketing and so on are all paid. The other way that money can be divided up is on a percentage deal whereby a share (usually between 8-15%) of the album list price is paid to the artist from the first record sold, though certain costs (like recording costs) are recouped against this. There can be various deductions offset against this which can reduce this royalty rate.

As said above, this is really just a rough guide and shouldn't be taken as legal advice. Next post will cover some other nuts and bolts aspects, such as mechanical royalties and so on.

Ben Howe - Independent Music New Zealand