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Step by Step Guide on How Recording Contracts Work

If you’re a singer, rapper, songwriter, producer, etc. you probably heard of recording contracts before. Even if you’re not involved with music, I’m sure you’ve heard of them. If you’re an independent artist you may think recording contracts are non-existent for you. Although I encourage artist independence, indie artists still need to know about recording contracts. I don’t necessarily encourage signing a record deal, but you never know when you’ll have to rub elbows with a contract. If you truly want to understand the music business, whether independent or mainstream you should know all about record deals. Here’s a step by step guide on how recording contracts work.

New Artist Deals

When explaining how record contracts work and how do record labels work, I’ll be discussing it in regards to new artists. 9 times out of 10 if you’re an indie artist and encounter a recording contract, it’s going to be a new artist deal. New artist recording contracts and established artists recording contracts are 2 different things.

Music Royalties

Music royalties are hands down the most important part of recording contracts. Royalties literally determine how much you get paid as an artist. If you’re wondering “how do music artists get paid”, royalties are the meat and bones to it. Music royalties are monies paid to an artist based on how much has been generated from usage of their songs. When you sign a recording contract as a new artist, you are basically assigning rights the record label. The rights include allowing the label to control, distribute and exploit your recordings and music. Royalties determine how much you get paid as the artist for allowing the label to exploit and promote your music. The average royalty rate for a new artist in recording contracts is 5-10 percent. Most indie artists who end up signing a record deal end gets 7 percent. This means each time your record is sold you get 7% of the earning. Sounds like it makes a lot of sense right? It even sounds like it’s easy to make a lot of money off of this method. However, it’s not this simple. Receiving 7 % as a record label contract percentage isn’t the problem. The problem is all the technicalities that comes with your royalty percentage. If you have album cost $14.99 and your royalties is 7%, you may think you would receive $1.04.  However, royalties aren’t based off retail price. Royalties are based on wholesale price. You have to know the wholesale price of your album. Typically wholesale album price range from $7-$9 dollars. Let’s say the wholesale price of your album is $7.99. Your royalty check will amount to the wholesale price ($7.99) multiplied by how many units your album or single sales.  If your album sold over a million copies and your royalties are wholesale based ($7.99), initially you’ll receive 55 cents for each copy. If you sold a million copies you would generate $550,000. That’s over a half a million dollars for a successful album. However, the reality is it doesn’t work this way. It would be nice if it was this simple and lucrative. The biggest factors that stops you from bringing in a lot of cash through music royalties are recoupments and deductions.

Recording Contracts Recoupments and Deductions

The two things all recording contracts have are recoupments and deductions. Recoupments are expenses and costs owed to the record label that the recording artist is responsible to pay back. Deductions are basically specific type of recoupments. The two terms are sometimes used interchangeably. If you’re an artist who signed a recording deal that gives you 7% music royalties and you album sales 1 million copies, initially you’ll bring in $550,000. However, with recoupment and royalties coming into play here’s how it’ll really work. Every cost and deduction comes out of your money as the recording artist. Everyone gets paid before you. The artist gets paid last. The record label gets paid first. If you’re a new artist, signed to a label that label has to put money out to promote you. Recording costs, video production, promotion, etc all comes out of your budget as the artist. The label pays for it initially. However, you have to pay it back. Before you ever see a dime of your music royalties you have to pay all these expenses back. The expenses come out of your royalty check. Most of these expenses usually comes to about 25% of your royalty check. Here’s where the breakdown start.

• Royalty check amount from going platinum (1 million copies) – $550,000
• Recoupment expenses (promotion, recording cost, etc) amounts to 25% of your total – $137,500 
• Your current check after recoupment expenses deduction – $412,500
• Average manager percent is 15% of artist income. So 15% of your current check amount  – $61,875
• Now your royalty check amount is at – $350,625
• Then your producer have to get his or her cut which is 3% of your current balance – $10,518
• Your royalty check is now at – $340,107

Now that all your deductions are done you still have a 6 figure check to take home. However, please keep in mind taxes and also record advances (I’ll explain that next).

• Taxes based on a 6 figure income are usually around 40%. Your tax deduction amount estimated price – $136,042
• Your royalty check is now at – $204,065
• However, keep in mind recording contracts advance

Recording Contracts Advance

Recording contracts advance or record deal advances are loans the record label provides the artist with. The artist is given this money before he or she generates any royalties. These advances are basically record deal signing bonuses. It shows that the label believes in your potential and also wants to support you during the making of your album. The advance is suppose to allow you to eat, travel and live while you’re working on your album. The only issue is once again you have to pay the record label back. This is why if you ever sign a record deal you shouldn’t want a large advance. Some artist think the larger the advance, the better the deal. This is far from true. Sometimes a large advance is nothing more than a trap. My advice would be to get a small of an advance as possible. Don’t spend the advance irresponsibly. As the old saying goes “pinch your pennies.” If you can survive and make it off of a $5,000 advance you should do so. Here’s the record label advance breakdown with a now royalty check amount of $204,065.

• Large advance amount is usually at $100,000. To pay that back from your royalty check, your check will now be at – $104,065.
• Small advance amount is usually range from $5,000-10,000. For this example I’ll use $7,000. Your royalty check after paying your advance would essentially be – $197,065.

Of course these prices and percentages can range depending on specific details of your recording contract or how you negotiate. However, this gives you a clear idea. After selling 1 million copies ultimately as the artist you may end up taking home only $197,065. This is good, it’s still 6 figures. However, it can go really fast if you don’t manage it well and live a moderate lifestyle. In order to generate multi-millions from your contract you have to selling millions and millions of records. The reality is in this day and time albums don’t sale the way they use to. However, you can still gain money from music stream, Youtube views, performance royalties and concert shows. Keep in mind every 1,000 streams is equal to 1 album sale.

Renegotiations

Clauses

Another thing you should be aware of with recording contracts are clauses. Clauses are disclaimers the record label can put in your contract that can hinder you as an artist. Clauses can affect your music royalties. They can affect how often you get paid. They can even determine whether or not your album gets released. When negotiating a recording contract there are clauses the record label adds and clauses the artist can add. As the artist it’s your job to protect yourself. The top clauses you should make sure are in your recording contract are:

• Release commitment – is a clause that says the record label has to commit to releasing your album within a certain time period. The time period should be 60-120 days after your song/album has wrapped recording.  You want this clause because there are a lot of artists (especially new artists) where the label signs them but never releases their project.
• Promotion rights – makes sure there’s a clause that says you have promotional rights to your music. This allows you to promote your music yourself along with the record label.
• Digital royalties – make sure there’s a clause that says you get digital royalties as the artist.

What clauses you should look out for that the record label may try to put in the contract. If any of these are put in the contact negotiate to get them taken out or don’t sign the deal at all.

• Excessive deductions – watch over for deductions that are designed to make you go into debt such as hotel stays, car rental, eating, etc. These type of deductions are completely different from standard deductions. When signing a contract get a thorough list of what all the deductions include. If they include any of the subtle items listed don’t agree to it.
• Long term contracts – a recording contract for a new artist should only be for 1 year. Watch out for contracts that try to bind you for years and years.
• Ownership of copyright – most record labels will attempt to keep ownership of song copyrights for a really long time or until your natural life. Beware of deals that give the record label ownership for a length of the entire life of the copyright. The life of the copyright is 70 years after the death of the creators of the work. So if a record label has ownership of your copyright for the entire length of the copyright you’ll never live to gain ownership.
• Large signing bonuses/advances – make sure the label doesn’t try to force you into accepting a large signing bonus. The larger the bonus the more you have to pay back from your royalties. Renegotiate the bonus to a lower price.
• Extremely low royalty rate – no matter how much the label may claim a really low royalty percentage is “standard industry practice” never accept a rate lower than 5%. Remember the royalty rate should range from 5%-10%. This includes independent record labels as well.

The most important key to always remember when dealing with recording contracts is to always have an entertainment lawyer review it. Never sign anything by yourself and never sign before an attorney looks it over. If the record label is trying to pressure you into signing without a lawyer reviewing or any negotiations this is a huge sign it’s a bad deal.