The Almighty Record Deal

Love it or hate it, a record deal is a big deal, and while it may only be words on a page, those words can ultimately make or break your career. Here we break down the ins and outs of what’s in a record deal, and what red flags you need to be on the lookout for.

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Guest post from AWAL

The almighty record deal — sought after, vilified, ever-evolving — boils down to words on a page, and those words hold weight. When signing a record deal, one clause can be the difference between picking your singles and losing your vision, amassing wealth and missing out, buying the dream car and leasing the minivan (nothing personal, minivan). Signing day is as serious as it is celebratory.

These agreements bind company and creator in legal matrimony, spelling out business specifics to fend off future he-said-she-saids. Some contracts have expiration dates. Others last forever. Almost always, they dictate a trade: multi-year copyright control for racks of cash, marketing commitments for a chunk of royalties, early investment for the final say on whether your hair should be green or blue for the next album cycle. Kidding. Sorta.

For better or worse, deals double as status symbols. An ongoing race to net the next big headline (“Artist X Signs for $99,000,000,000!”) distracts teams new and old from the underlying mechanics that impact more than money. It’s easy to gloss over hidden complexities and fragmented payouts to secure surface-level bragging rights. But big digits hardly scratch the surface of what’s inside the PDF files that lawyers go to war over, which is why we’re taking a tour of the fundamentals, right here, right now, in the second Decoded: Record Deals installment.

Pt. 1: The History of Record Deals

P.S. This is not and is not intended to be legal advice. Any and all contracts / agreements / deals etc. should be discussed with a licensed attorney.

Make Way for Boilerplates

To honor humanity’s endless push toward pure efficiency (and to protect label financial interests), many record deals start with the same foundation, which is what we’ll dissect in a second. While most of these agreements consist of the same Commercial Clauses (advances, royalty rates, term lengths, etc.), actual numbers vary wildly. The following conditions often impact why two supposedly similar artists might receive different offers.

• Whether the artist already has a track record of music sales and streams
• Whether the artist has co-signs from notable writers, producers, artists, etc.
• Whether the artist’s live show is a victory lap or a work in progress or a wreck
• Whether the artist’s social channels show over-indexing engagement rates
• Whether other music companies are looking to sign (or resign) an artist
• Whether the artist is working with a high-caliber team already (e.g. management)
• Whether the lawyer has a particularly close relationship with the company
• Whether the artist brings a built-in audience to the table (e.g. Instagram maven)
• Whether the artists’ catalogue (prior releases) are available to distribute
• Whether the label’s A&R team believes in the artist’s music more than most
• Whether the label’s executives are personally interested in the deal process

Record Deals (Abridged Version)

Short and sweet synopsis below. Keep scrolling for deeper dives.

• Territory: Where the label controls the rights to your music
• Term / Exploitation Period: How long the label controls the rights to your music
• Rights: The different things the label can legally profit from, use, and/or control 
• Recording Commitment: The # of songs or projects you have to deliver
• Release Commitment: The minimum product(s) that the label has to formally release
• Advances: Recoupable cash payments (aka future earnings) you can spend freely
• Budgets: Recoupable cash reserves usually used for specific things, e.g. recording
• Royalties / Revenue Share: The % of revenue you keep v.s. the % the label keeps

The Juice: Expanding On Record Deal Key Points 

With pesky caveats sidelined and high-level perspective provided, we can now dig into the meat of the matter: the contractual language that many record deals have in common, from small-scale indies to traditional corporations to yours truly. Grab your caffeinated beverage of choice and buckle up.

• Territory: All the places a music company can distribute, market, and profit from your work. This tends to be “universe” because future humans will stream “Rocket Man” (Thugger’s version) on Mars, among other reasons. That said, it’s still common to find territorial windows; for instance, working with a French-based label to build buzz in Europe while a U.S. company handles the rest of the world.
• Rights / Grant of Rights: All the things the music company plans to make money from and/or promote, which might include streams, downloads, and sales of master recordings, official artist videos, photos, logos, cover songs, synch licenses or sublicenses, your name, cover artwork, and bios, plus merch, touring, and more in 360 deals.
• Term / Exploitation Period: The period of time in which the music company you sign with has the right to distribute, market, sell, and/or profit from your work, usually exclusively, aka if anyone else tries, they’re gonna be in big trouble.

Terms are often the sum of two things: The Initial Period, e.g. the time it takes to produce, deliver, market, and sell the first EP or LP, plus any Extensions, e.g. prolonging a deal because the artist hasn’t made back the money provided by the label, plus Options, aka the company’s right to keep an artist for another project if they so choose. Labels will pick up their options if (1) the initial release meets financial or cultural expectations, (2) if they believe in the artist enough to weather weak commercial performance, or (3)  if they want to drop the deal but don’t want another company swooping in and signing them up, lest they look foolish later. That last one does happen, and yes, it is depressing.

Some terms last as little as 30 days for rolling distribution. When a company takes on more risk by providing funding, marketing support, physical distribution, or radio promotion, deals tend to last longer, ranging from 24 months on the low end to life of copyright on the high end. Perpetuity deals give labels a Perpetual Grant to release, administer, own (or co-own), and profit from a song or project until the world ends, aka until the copyright expires, and they are unfortunately still common practice. Shorter deals, on the other hand, exist as Exclusive Licenses, which is when an artist tells a label, “You can release this — your welcome — and collect money from it for X months and then you have to give it back.”

• Recording Commitment: The number of master recordings the artist has to deliver in a given time period. This can define how long an album has to be. Sometimes, it’s literally just that, a preset number of songs, and sometimes it’s spelled out as a Product Commitment, aka a collection of songs explicitly used for an EP or LP.
• Release Commitment: The company’s pledge to release a minimum product (a single, EP, or LP) within X days, weeks, or months of you delivering the final recordings to them.
• Advances: Lump sums of money (usually cash) given to an artist when they sign a record deal (aka Execution), marking the start, or Commencement, of the Initial Period, or when they begin a subsequent project period, marketing the start of an Option. It’s common to see an advance split into parts, e.g. 50% paid upfront and 50% paid after delivering the required EP or LP.

Generally, artists can do whatever they want with advances — aka a Discretionary resource. Some use that money to fund tours. Others cop mansions. Whatever you do, know the initial dollar amount isn’t what you take home. Managers (15 – 20% share) and lawyers (5% share in the U.S.) traditionally commission off these label payments, meaning a $100,000 advance would really be $75,000 – $80,000 for you, before taxes.

Unless you’re a superstar with some extra bonus cash courtesy of the company, there’s also a good chance advances are Recoupable, a loan the artist must pay back. Think of them as your future earnings. If the label expects you to generate X dollars over the course of the deal term, they can afford to provide a portion of X early to cover important costs.

• Recording Budgets / Marketing Spend: These are recoupable advances that you can’t freely spend. Usually, in addition to cash advances, labels will establish these dedicated resource pools to cover the costs of making and promoting music. These things are sometimes Mutually Approved, which means exactly what it sounds like, though traditional companies tend to have the final say about what’s spent where.
• Artist Royalties: Your cut of revenue from streams, downloads, CDs, etc. Royalty rates can vary by territory (e.g. a higher rate for domestic sales and a lower rate for international sales) and won’t hit your bank account if you have an unrecouped balance (if your royalties haven’t paid back your advance and budgets). It’s standard for acts to receive around 15% of revenue in traditional deals, 50% with indie labels, and generally between 65% and 85% with AWAL, depending on our level of involvement and the resources we provide. Industry legalese for sales is Exploitations, btw. Need more caffeine yet?

It’s easy to overlook a crucial truth about revenue shares: Recoupment of advances solely comes from the artist’s portion, not the label’s, in traditional record deals. In other words, if you receive a $10 advance and you have a 15% royalty, your music will have to generate about $66.67 in Gross Receipts (total sales), not $10, before you start seeing steady checks from your music. Additionally, Direct Costs (costs required to create, distribute, and market your master recordings) also tend to come out of gross receipts before artists see their royalty rate take effect.So long as artists receive the majority rev share, this model does no harm, but it’s still standard practice to give creators much less than 50% at most traditional companies.

Conversely, Net Profit Splits, which you might find at indies and streaming labels, offer an alternative, with both company and creator splitting costs evenly. Only after all costs recoup will either side see profit.

• Mechanical Royalties: Money owed by the label to the composition owners (songwriters and publishing companies) for every stream, download, and physical purchase, enforced in numerous countries by government bodies and societies. In the U.S., the statutory mechanical rate is 9.1 cents per track purchased, and fractions of a penny per stream.

Grey Areas Red Flags

Record deals aren’t always black and white, making “red flags” a bit of a misnomer, but some additional clauses, phrases, and keywords can have a big impact on artists’ careers.

• Related / Connected / Collateral Entertainment Activities: Essentially a 360 deal, this legal language lets music companies take cuts of different artist revenue streams, including merch, touring, fan clubs, sponsorships, endorsements, etc.
• First Right of Refusal / First Look / Matching: Lets music companies make an initial offer or competitive offer to support (and profit from) an additional portion of your business, e.g. a music company striking a deal between you & their merch division, or securing additional music rights, e.g. having digital release rights to your work with a “first look” guarantee on physicals. If you ever wanted to sell vinyl, your label would get a chance to make and sell them on your behalf.
• Min-Max Floors / Ceilings: Pre-agreed advance-budget combo ranges that ensure artists receive no less than X dollars for a future project, and ensure labels pay no more than Y dollars for that project if they choose to pick up that option. For example, an artist might receive at least $400,000 and at most $700,000 for their second LP option, no matter how much or how little the first album sells. Think of it like two-way insurance. How does the label land on an actual figure? Quick maths. An equation roughly bases a project’s total budget on ~67% of the previous project’s 12-month sales. So, $1M in sales on LP1 means a $667K budget for LP2, with 15 – 25% of that (around $130K) going toward the cash advance. If this figure is above the pre-agreed ceiling, you won’t get any more than that maximum figure.
• Bumps / Escalations: Automatically triggered boosts to royalty rates, bonuses, advances, and budgets in the event of a pre-agreed achievement, e.g. recouping an initial advance, winning a Grammy, or scoring a Top 10 hit.
• Controlled Composition Clauses / Reduced Mechanicals: Lets label pay a fraction of the mechanical rate ($0.091), usually 75%, to artist / songwriter(s). Also lets label only pay mechanical royalties on a pre-set number of songs per project, e.g. paying 10x the rate for all LPs you produce, even if you make an LP with 15 songs, which would otherwise warrant 15x the rate.
• Key Person’s Clause: Lets artist leave a deal if the designated label person leaves.
• Holdback Periods: Ensures music company a window of exclusivity in which the artist cannot release other music within a stretch of time, e.g. a singer agreeing to not release a non-LP song within six months of that LP’s public release.
• Cross Collateralization: Lets the label cover the losses of one release by an artist with profits from another release by that artist. In 360s, labels can also take money from additional revenue streams, e.g. merch or touring, to cover music losses.
• Accounting / Audits: Lets label control when, and to what extent, you can examine their reporting statements and pursue legal action if something is fishy.
• Third Party Obligations: Makes artist or label responsible for handling accounting of certain costs, e.g. featured artist royalties or sample clearances.

Consider this the tip of the iceberg of things to consider when signing a record deal. Some contractual fragments reflect artists’ rising power, while other ancient, oddball clauses might turn to dust if you shake them hard enough. Record deal standards still largely reflect old realities (the risks of manufacturing physicals, the costs of international distribution, vinyl breakage, a monopolized chokehold on different promotional platforms). They read like tree rings, fossilizing the legal and financial realities of a different era. Music’s history exists in archived articles, old footage, TV appearances, social media, fans’ memories. The industry’s history resides in redlined documents and the words above dotted lines. When those words regularly reflect all that has changed — marginal distribution costs, plummeting costs of production, globalized streaming — artists will emerge in control, as they should be.