Legends abound of investors getting skinned alive in Hollywood, so this article sets out a list of questions that film investors should ask before investing to avoid ending up on the carcass heap. And don’t just accept the first answer you hear; as President Regan said, “Trust, but verify.”
1. What is the track record of the producers? Have they sold films for a profit before? Will agents take their phone calls? At a bare minimum, do a simple internet search to make sure they aren’t charlatans.
2. Yes, you’ve been told that a number of “A-list” actors are “attached,” but are they really? You might want to touch base with their agents or lawyers to find out what “attached” means for this film.
3. What is the real status of the production? Is it really a “go,” or is the strategy hope? If you are investing in development, then at least be aware of how few films go from development to production.
4. What is the experience of the director? Have prior films stayed on budget? Have the films been successful?
5. Perhaps most important and most overlooked: Is there a strong line producer (the person that provides adult supervision on set and makes sure the film stays on budget)?
6. What is the plan for distribution of the film? Are there any pre-sales, or is the plan to swing for the fences by producing the film first and trying to make a killer sale on the festival circuit?
7. What is the budget of the film, and who has vetted it without rose-colored glasses?
8. What is the plan if the film goes over budget? And don’t rely on a completion bond, as discussed below.
9. And speaking of the budget, how much of it is going into the pocket of the producer, directly or – all too often – indirectly?
10. Is the other financing for the film locked in, or is the producer relying on the word of a bunch of schemers and dreamers to come up with the rest of the financing?
11. When does the investor have to fund? The later, the better, and preferably not before commencement of principal photography.
12. Will distributors be required to pay directly to a third party collection account governed by a collection account management agreement that the investor will be a party to?
13. How many guilds (e.g., SAG-AFTRA, DGA, and WGA) are involved in the film, and what percentage of gross receipts will they be entitled to before any payments to the investor?
14. Are there any deferments, bonuses, or gross participations to talent that will be paid in front of the investor?
15. Where does the investor stand in the financing stack? Is there a loan or senior equity in front of the investor?
16. What are the precise terms for calculating the recoupment, preferred return, and share of profits to the investor? Are the terms clear, or can someone play “Hollywood Accounting” with them?
17. Are you getting some goodies, like a main title “Executive Producer” credit, the right to visit the set, and tickets to the premiere and after-party?
And here are a couple of issues that many investors ask about but that really don’t matter:
1. It is not even worth reading the screenplay. As one film mogul famously said, “No one knows anything,” and investors are not going to have a better crystal ball than everyone that has lined up to make the film.
2. And the absence of a completion bond doesn’t matter: completion bonds are worthless to anyone with equity risk in the film, since the completion guarantor will destroy the film if necessary to complete it.