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Compensation > Compensation - Pg. 228

Licensing 228 · Production Profits. The licensor should receive some share of the producer's profits. As always, beware the path from gross to net: it is a good idea to include a "most favored nations" clause in the definition, which states that the definition of net profits for licensor will be no worse than that for any other parties sharing in the producer's net profits. As with packaged goods, the manufacturer (in this case, the producer), sells its product through a distributor (the studio) that takes a percentage of the revenue as a CALCULATING RIGHTS FEES FOR MOTION PICTURES Rights fees for motion pictures are usually calculated by a formula and paid in two or three stages: the option fee, the guarantee (paid on exercise of the option), and any additional rights fees due on the start of principal photography. Typically, payments from one stage are deducted from payments at another stage, as you will see in this example. Keep in mind that an option generally won't be exercised until the producer starts production--no sense paying the guarantee if the project falls through. Assume: Initial Option Fee: $5K Renewal Option Fee: $5K Guarantee: $50K Rights fee: 1% of production budget on first day of principal photography Additional rights fees:Another $50K for game sales in excess of 300,000; an additional $100K for game sales in excess of 600,000. Sales to be determined on the first day of principal photography. Illustration One: Producer uses the initial and renewal options ($10K total). Licensor is paid $40K (exercise price less option fees paid) on the day the option is exercised.The game sells nicely, but is not a blockbuster (200,000 units).The production budget turns out to be $5M, for a direct to video. Licensor does not receive any additional money ($50K, less $10K option fees already paid = $40K).