Film Finance: The Waterfall.

am i going to have enough revenue to pay

back my investors or the actors that

have net profit participation points

to answer those questions it's important

to understand the waterfall

not as in niagara falls sutherland or

iguazu but as the term applies to film

finance

the waterfall represents the flow of

revenues and profits from the consumer

to the financial stakeholders

at the top of the waterfall is the

entire amount of money the film has

generated and as we move down the

waterfall we can see which entities

investors and participants are

prioritized and in what order they are

to receive funds

the concept could be applied to any

business but it's extremely helpful with

movies since they require a number of

investors distributors and stakeholders

each waterfall could be set up

differently based on the contracts

you've negotiated but to illustrate the

idea i'm going to pretend that the first

play fatelink produced fate of the

monarchs has been turned into a feature

film

let's run an example waterfall

let's say fate of the monarchs costs 250

000

to make all it

to finance the movie we found five

investors who each put up 50 000

in private equity

our deal with them is that they will get

their original investment plus a 20

return

once they've been paid their original

investment plus 20 percent return

each of the five investors will get 10

of the net profits fate link the

production company will get thirty

percent of the net profits three stars

of the film will each receive five

percent of the net profits and the

writer director will also get five

percent of the net profits okay so those

were the deals we made before stepping

on a set then we went out made the movie

and now it's time to find distribution

and sign some more deals we decide to

hire two sales agents on commission one

to represent the film in the us canada

and one to represent the film

internationally

each sales agent charges us a 10

commission on funds received by the

production company

our domestic sales agent charges us for

expenses on her territories up to ten

thousand dollars but our international

sales agent does not charge for expenses

in the end as fate would have it we

premiere at a festival and get an offer

for worldwide distribution from

amazing distribution company

so despite having two different agents

we end up with one deal i'm doing this

mainly to make our example waterfall a

little bit easier even if it's not quite

realistic

our deal with amazing distribution

company is that they're going to retain

25 of sales and we get 75 percent of

sales but they're also going to charge

us for their marketing expenses up to 25

000

they're not going to give us a minimum

guarantee

they're good negotiators

but good news

over the seven years that they

distribute the film

amazing distribution company earns 500

000 for it so the film doubles its money

right

not quite

let's see exactly what happens with that

500 000

as we go through our example waterfall

brief aside

where did that 500 000

come from we're assuming that amazing

distribution company went out and

licensed the film to a few cable

companies in different parts of the

world

then licensed the film to several

streaming platforms

they put the film on retail sites and

sold dvds and blu-ray versions of fate

of the monarchs and people bought the

film as a digital download on a number

of platforms that amazing distribution

company found

then negotiated and transferred the

relevant files to those platforms

whatever portion those platforms took as

a percentage

amazing distribution company never saw

that money and that doesn't go into the

500 000 in revenue that i'm talking

about

now where does that money go

in reality this money would have been

distributed over those seven years but

that would make our example extremely

complicated so for the sake of

efficiency i'm gonna assume one payment

of five hundred thousand dollars it's

also relevant to know that 400 000 of

the sales came from the us canada

while a hundred thousand dollars of the

sales came from international

territories

okay

so where does the money go first of this

500 000

our distributor is slated to earn 25

or 125 000

leaving the remaining 75 percent or 375

000

for us

however the distributor used the entire

25 000 of expenses for sales and

marketing so they will deduct that

amount from the 375 000 owed to us

leaving us with 350 000. now it's time

to pay our sales agents

as it happens both our domestic and

international agents negotiated a ten

percent commission

but remember our domestic sales agent

charged us ten thousand dollars in

expenses

as it turns out eighty percent of our

sales were domestic and twenty percent

of our sales were international that

means that two hundred and eighty

thousand dollars of our funds came from

domestic sales and seventy thousand

dollars came from international sales so

we owe our international sales agent

seven thousand dollars and our domestic

sales agent

thirty eight thousand dollars remember

those expenses she negotiated okay so

that leaves us with three hundred five

thousand dollars of that amount we owe

our five original investors their fifty

thousand dollars back

so

fifty thousand dollars times five is two

hundred and fifty thousand dollars so

the good news is we've managed to pay

back our investors now on top of their

original investment

each investor is owed a twenty percent

return which would be ten thousand

dollars each

so let's go ahead and pay that ten

thousand dollars multiplied by five

investors

now each investor has gotten their money

back plus a twenty percent return which

is fairly standard

after we pay that we have only five

thousand dollars left

of that five thousand dollars the

investors each get ten percent of net

profits failing gets thirty percent and

our three movie stars get five percent

oh and the writer director also gets

five percent so

our investors would each get an

additional 500 bucks fate link would get

1500 and each of the movie stars and the

director would get 250

for this risky adventure of making a

movie each investor has walked away with

sixty thousand

five hundred dollars fate link has

scored fifteen hundred bucks and the

stars and director made two hundred and

fifty dollars in net profits and of

course the stars and director were also

paid a salary up front that came from

the original 250 000 budget

you can imagine one of the movie stars

calling their agents and saying i know

this movie only costs 250 000 to make

and it may double that and yet i'm only

getting 250 bucks am i getting screwed

here

according to the waterfall the way this

particular film was set up the answer is

no

the paycheck given to the movie star is

100 correct but that's why it's

important to pay attention during your

negotiations and understand what each

contractual provision might mean not

only for yourself but for the other

profit participators at the bottom of

the waterfall

as complicated as this example has been

real life examples are likely to be even

more complicated because there are

likely to be ongoing expenses for the

production company and possibly residual

payments to actors as well depending on

the contract that's been signed with

talent

but i didn't want to overwhelm you just

give you an overview of the concept

i hope this video has helped you better

understand the idea of the waterfall as

it applies to film finance if you enjoy

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