The fundamental units of record contracts that are universally compared and negotiated are "points." Points refer to the amount of percentage points a band will receive for its royalty rate. If your offer is from a major label, your points could vary between 10 and 15 percent. 8-12 percent is customary on a smaller label, but not always. Some deals I've seen go as far as giving the artist and the label a 50/50 split of the net profits, usually after the costs of production, promotion and distribution have been covered through recoupment. Record companies today are trying to make the royalty rate paid to artists as attractive as possible.

So, which is the best deal? The one with the highest points, right?
Not necessarily. Points or royalty rate percentage is just ONE of the variables in the income formula.

Just what are you getting your points multiplied against? (You know, percentage of WHAT?) Generally, the royalty rate is a percentage of the standard retail-selling price. You will get your full royalty rate for each full price CD or tape you sell through normal retail channels. Normal retail channels are usually record stores like Best Buy, Virgin or Sam Goody. Many equations assume $15.98 as an average standard retail-selling price. But what about other outlets that might sell your CDs? Record club sales, wholesale deals, cutouts, consignment sales, "over the stage" sales and many other incarnations all skew an across-the-board application of points against selling price. Record companies usually try to pay a fraction of your royalty rate for sales outside normal retail channels. It is impossible to determine how much a band will get for selling a CD without evaluating all of the channels it might be sold through. When I represent a band negotiating a record contract, I usually sit down and discuss with them the various calculations that can occur, to determine what they can or should expect for royalties based on the distribution and sales strategies being considered in the deal.

Now, is that all the math we have to worry about?
Probably not. In addition to the reduced royalty rate on albums sold outside normal retail channels, there are also several reductions in your royalty basis. Think of the royalty basis as the total pool of records pressed and available to sell. Briefly, some of those reductions or "discounts" that are taken out of your royalty basis are as follows: First, no royalties are paid on records given away free or for promotional purposes. If you give away 200 copies of your 1000 pressing, expect 20% of your possible royalties to be given away too! Another large traditional deduction is the so-called "packaging" deduction. The theory behind this deduction is that the band pays for the packaging of the CD and tape. Typically, these deductions range from 15-30 percent of your royalty rate. In effect, a 12% royalty rate and a 25% packaging deduction lowers your rate to 9%. While this is a historical deduction, now that digital distribution of tracks and albums is possible, there should be no packaging discount taken from those sales-because there's no package!

Another royalty reduction to keep in mind is if you have what's called an "all-in" royalty rate. This means that you must pay the record producer's royalties out of your royalties. Generally, a producer will take 3 points (3%) which lowers your royalty rate even further. Your royalty rate is meaningless unless it is viewed in the context of all the deductions. In general, an artist with a major label deal can expect somewhere between $1.00 to $2.00 in royalties for each full-priced ($15.98) CD sold through normal retail channels. A deal offered by an independent label can get much more competitive, and at times approach a $7.00 royalty for a $15.00 CD sale.

What else should you keep in mind?
Most record contracts are an exclusive agreement. This means that you will not be able to record for anyone else other than that record company during the "term" of your contract. The term is the length of the contractual relationship between the artist(s) and the label. Contrary to popular belief, record companies do not sign artists to guaranteed three, five or six album deals. It may be a three record deal, but nothing obligates the label to record three records. The three-album deal means that the record label has the option to record up to three albums. Typically, a record company will record one album and see how it performs in the marketplace. If it sells, they will exercise their option to record a second album, and so on. If the first album does not do well, the label usually drops you. Record companies request longer option contracts because if the band does well, the label wants to secure the band to their company. Since labels invest so much, and usually take big risks by signing the band in the first place, they want to be able to share the success of the band over a longer period of time. If you don't want to be chained to a label for a long period of time, you either better get a one record deal, or negotiate a clause that allows you as the artist to terminate the relationship before its anticipated end, without negative repercussions to you.

What about "cross-collateralization"? Is it bad or good?
First, here's what it is. We previously discussed recoupment. That's when a label wants to earn back all of its money it fronted an artist for advances, recording, production, distribution, promotion, etc. Usually, those monies are repaid through the artist's share of royalties from record sales. If that is what is being offered in the deal, there is no cross-collateralization. However, there are other places a band can make money when they put out and promote a record. There is money earned from broadcast and live performances of the music from the album. This is money the band usually gets to keep away from its label. There is also money that can be earned in selling t-shirts and other merchandise. Some record deals allow the label to recoup money from other sources, such as publishing or merchandising. Although this is usually avoided from the artists' perspective, labels asking to do it is not uncommon, and sometimes not as bad as it seems at first blush. If this is in a contract, it means the band will not receive any money until the label is paid back, i.e. the band is recouped. Of course, you don't need to sell as many albums to become recouped on an independent label. Smaller independent labels that cannot afford to lose as much money as the major labels ask for this more frequently. The flip side to this is the indie label might have given you a smaller advance, and is probably giving you a greater royalty rate, or share of the profits, so you might not need to worry as much about such provisions.