The Truth About Record Deals (And How To Negotiate Them)

Author : 6AM
December 13, 2016

The Truth About Record Deals (And How To Negotiate Them)

Signing record deal

The following guest post comes from Budi Voogt, founder of Heroic, a label group and management agency, and author of The SoundCloud Bible, now in its third edition.

Labels come in all shapes and sizes; major labels, larger independents, smaller independents, net labels and online collectives. Whether you’re an electronic music producer or indie band, it is probable that you will be involved in a record deal at some point in your career.

In this article, we’ll talk about the nature of recording agreements, key clauses that you should understand and terms that are reasonable and favorable to negotiate for. If you’re not yet familiar with the basics of music copyright and publishing, I recommend you read my guide before proceeding.

Recording Agreements

The paperwork for record deals go by the name of recording or master license agreements, as their purpose is to facilitate a license; you as the sound recording copyright (read: master recording) owner are assigning rights to the label, which entitles them to control, distribute, promote and exploit your recordings.

Record deals have developed a reputation of being notoriously strict on artists, which in many cases can be true. It all depends on who you’re dealing with, your bargaining position, negotiating skills and relationship with the label.

Major labels and larger independents traditionally offer tougher deals and are harder to negotiate with than their smaller counterparts. Partly because of company culture, partly because of clout. Everyone wants to get signed with them, yet they need to make money – and there’s no guarantee that any signing will be successful. Their deals have shaped so that these compensate for the inherent risk of their business model, as well as to support their large organizations.

Whether you’re an artist or industry professional, it is important to understand the key clauses of recording agreements and to find someone versed in legal affairs, whom can advise and negotiate for you. This is better than negotiating for yourself, as artists are often too emotionally involved with the outcome to be able to play hard ball. Good legal advice can be gained from music industry veterans, entertainment lawyers, publishing agents and experienced artist managers.

I have outlined the key clauses of recording agreements below, each with an explanation as well as advice on what a reasonable settlement would be. These findings are based on our experiences negotiating deals for our labels and artists, as well as extensive research on the subject.

Remember – these agreements are variable on whom you’re dealing with and the outcome needs to be something that’s beneficial for both parties. Whenever you’re in doubt, ask for advice. And always realize that this is a process of giving and taking – it’s OK to have a weak agreement on a certain clause, only to get more favorable terms elsewhere.

Ownership, Control and Territory

The label will need a degree of control over your sound recording copyright (read: master recording) to be able to exploit it; to sell, distribute, promote, license and such.

It is in the labels best interest to attain full ownership over the copyright, for as long as possible. For you as an artist, it is in your benefit to keep the copyright and only give it out for a short period of time.

Labels will typically initiate deals with a contract that asks for a transfer of copyright, or to have the work considered work-for-hireThose words should ring your alarms, as work-for-hire means that when an employee or contractor makes something for an employer, the resulting deliverables become property of that employer. In other words, you give away all your rights to a work. Considering tracks work-for-hire is industry practice for remixes, but in cases of original work you should never agree to this.

A transfer of ownership is usually worded as an assignment or transfer of copyright. Some labels will ask for this for the life of copyright (which lasts for 70 years after the death of the creators), or in perpetuity.

Ideally, you want to do neither of these. Instead, create a license deal, where you license exclusive control over the master for a limited period of time. These rights should include those to distribution, promotion, exploitation, non-exclusive rights to use your name, likeness and image in relation to promotion of the recording.

In modern deals, it is also important that you explicitly ask for promotional rights to your music on your own online websites such as your YouTube and SoundCloud account, as well as your website. We also explicitly ask to maintain rights to grant ‘non-commercial promotional web-uses‘ to specific YouTube music channels, for marketing purposes.

The rights granted under a record deal are always granted for a specific territory. With the internet being the modern playground, most labels ask for a worldwide license, often even specified as broad as the universe.

In high-level deals it is common to license only to specific territories, so that one rightsholder (for example – you, the artist) can negotiate deals with different labels in different markets (read: territories). You could have one label exclusively represent your work in the USA + Canada, another in Europe, another in Asia and another in Australia + New Zealand. The benefit to doing that is that each label can use their expertise of their own market to market it more effectively, but you can also gather more advances on royalties from each deal, as well as negotiate more marketing / promotional investments (for radio promotion, video clips etc).


Duration of the Deal

Many labels will ask you to sign over the rights for a term lasting for perpetuity(read: forever). Technically, this is impossible – and you need to change this language to better specify the duration.

In copyright law, the life of copyrights made after 1978 last until 70 years after the death of the last living co-creator. In other words, if you individually made a record and die now, the copyright will expire 70 years from now. Should you have recorded it with a singer and you die first, then the copyright will expire 70 years after the singer’s death.

It is not uncommon for artists to grant rights for the duration of copyright, however a well-negotiated license deal usually lasts between 10-20 years.

Artistic Control

You want to retain creative control over the artistic aspects of your release.

That’s why I urge you to add prior-approval language to: the selection of songs on records (if you’re not already choosing yourself), artwork used, any videos and/or promotional materials made and used, remixers, and to restrict the use of your name, brand, image and likeness to promotion of the recordings.

With our Heroic artists we like to be hands-on and create artwork, videos and promotional material ourselves, which helps us build stronger brands. Labels will often opt for marketing materials that either place emphasis on their brand, or go for the cheaper route – it’s often better to take things into your own hands.

For clarification, prior-approval language means adding wording such as “subject to prior written approval of Artist” to a clause.

Exclusivity and Option Clauses

Most labels do not want to sign deals for individual records. They want long-term exclusivity of an artist, or a guarantee on more material.

Their reasoning makes sense; they do not want to kick-start artists to later find them leaving for (bigger) labels. So they ask for product commitment rights on anything made within a specific term, or options on future releases.

Deals with exclusivity over a certain period are usually worded in such a way, that an artist is exclusively bound to the label until the committed products or options have been released.

For example, a deal may be signed where an artist inks for a 4 track EP, with an option of another two singles. The exclusivity may last for three months until after the final single has been released, and the deal may also allow certain periods in between the releases for the label to decide whether they want to accept the artist’s new demos, as well as a period that gives them room to release it. This could mean that the EP came out in January, the first single option claimed in March, the first single released in June, second single claimed in August and released in November, with exclusivity lasting for two months until after the final release. That’s almost a full year of exclusivity!

I’ve seen these deals firsthand and must say that I am not in favor of them. Artists today are fully dependent on their ability to cultivate an audience and generate hype. Restricting your freedom to release music is detrimental to that. These deal types are only justified when the label is investing a lot of resources; for example when they’re paying for the recording of three albums and are helping you set-up a national concert tour.

Instead, I favor option clauses, which give labels the right to put out future releases, on the same terms as the initial deal, if the first release and collaboration is satisfactory. This is how we structure our deals with our label Heroic.

For example: an artist commits to release an initial single, but signs an option clause for a follow-up EP (3-5 tracks). If the release does well, we have the rights to exercise the option and the artist is committed to sending us all his new music first, exclusively.

Re-recording Restrictions

Larger labels will ask you for a re-recording restriction, which limits your ability to record, license or exploit the compositions (read: songs) embodied in the recording again. In other words, they want to prevent you from taking your song, recording it anew and licensing it to another label.

This is OK but do not sign for a restriction longer than five years after product delivery, or two years after termination of the agreement.

Release Commitment

It is not uncommon for labels to sign records and never put them out. That’s why you need to ask for a release commitment.

This clause needs to include language that commits the label to releasing your record within 60-120 days after acceptance of the product (first single, follow-up EP, etc), as well as granting you rights to get your recordings back in the case they do not release within that period.

Marketing Budget

When dealing with majors or larger indies, you will want to ask for guarantees on paper for marketing efforts.

Bigger labels have internal marketing and radio departments, which you want them to commit to use. Additionally, it can be useful to try and get an additional budget for third party promotional efforts such as music videos and the hiring of independent radio pluggers and PR agencies. These investments are usually recouped 50% from artist royalties.

In wording, I may enter such a clause as ‘utilizing internal marketing and radio departments to best abilities for plugging the record to radio in the territory of x‘ or by ‘Parties agree to allocate a budget of €1.5000, to be advanced by Label, for expenditure with a mutually agreed independent radio promoter. These costs shall be recouped 50% from Artist’s net receipts’.

Physical and Digital Royalties

Artist royalties, or royalties in short, are the monies owed to an artist for the use of a master recording. The label pays these to the artist.

No matter what type of deal you’re signing, even if it is with a digital label that is only distributing your music as a free download, the agreement should include language for both digital and physical royalties. You want to make sure that you’re entitled to monies and have negotiated a fair share, should the label eventually decide to make CDs or distribute digitally.

The calculation of royalties should be specified in the agreement. You want these to be based on Net PPD (published price to dealer), or in other words, the wholesale price after store and distribution fees. This applies to both physical an digital.

So when a track is sold to iTunes for $0,99, iTunes takes off 30% (about $0,30), leaving $0,69, of which a label’s distributor might take 15% (about $0,10), making the Net PPD $0,59 – this is the money that is split between the label and artists based on the royalty rate.

One of the most important aspects of your deal is negotiating a fair royalty rate.

Labels often enter these negotiations with a low royalty rate, serving as an anchor for future discussions. The larger entities often have a company culture that encourages this, rooted in the old business model of the industry (where the margins on physical sales were huge). In my experience, the forward thinking independents are usually much more forthcoming.

Your expected outcome should be varied based on the type of label you’re dealing with. With majors, royalty rates of 20-25% on physical and 25-35% on digital are common. With indies, even larger ones (such as Armada, Spinnin, Monstercat), digital rates of 40-50% and physical rates of 20-30% are fair.

Mechanical Royalties and Controlled Compositions

The controlled composition clause is the hardest part of a record deal to comprehend. You can find a more elaborate explanation of it in my indie guide to music copyright.

When a label makes a copy of a record, whether physical or digital, a license is needed from the writer of the composition (also known as asong) embodied in the master recording. This license is called a mechanical license (from back in the day, where a copy was a mechanical reproduction).

In the USA, a label can bypass the songwriter and get a mechanical license directly by performing a number of legal procedures – this is a compulsory license. The price for such a license is fixed by law and is referred to as the statutory rate – now set at $0,091 per physical copy or download below five minutes in length, or when longer, at $0,0175 for every minute or part of a minute.

So for every 1.000 copies of a 3 minute single , the label needs to pay the songwriter $91 (1.000 * $0,091) in mechanical royalties. For 1.000 copies of a 6 minute single, the label pays $105 (1.000 * 6 * $0,0175).

Not all countries have fixed their rate by law, whereas others have – but not at a dollar amount. Most European countries calculate their statutory mechanical rate as a percentage of wholesale price (around 7-10% of Net PPD of a single sold to iTunes or a physical store).

Because compulsory licenses enable labels to get mechanical licenses even if the artist is unwilling, or unreachable, the mechanical royalties in deals are always based on the statutory rate. However, requesting an actual compulsory license is a lot of work, so all the labels prefer settling on a mechanical license fee in the label deal.

This means that in reality, all the labels request licenses from the songwriters (or their representatives, the publishers) directly. And this can be a lot of work, so most songwriters and publishers have registered their compositions with mechanical performance right societies (PRS’ such as the Harry Fox Agency), that issue mechanical licenses and collect revenues on their behalf.

Sometimes the recording artist of a record deal is also the songwriter, which is why labels always include a controlled compositions clause in a recording contract, that pertains to all the compositions the artist owns or controls. Why? Because when you have ownership of a copyright, you can negotiate mechanical rates that are lower than the statutory rate – which is exactly what the label will ask for. Common reductions are 75% of minimum statutory rate, meaning they only pay 75% of the statutory rate that applies to short songs (so 75% of the $0,091 per copy rate, even if the song is longer than five minutes).They might also want to restrict royalty payments to just records ‘manufactured, sold and not returned’ instead of the usual ‘manufactured and distributed’. And to put a cap on the amount of records over which mechanical royalties needs to be paid – usually to 2 tracks per single, 5 tracks per EP and 12 tracks per album. In that case, should you put out a 6 track EP, they only owe you mechanical over 5.

When negotiating mechanicals, your ideal scenario would be a 100% floating statutory rate, paid over goods manufactured and distributed. You may settle on a 75% reduced rate, however this should give you leverage to ask for a larger advance. As for caps, 2 per single, 5 per EP and 12 for an album are OK – however then you must make sure to not exceed these limits when delivering your records.


Third Party Income and Licenses

This relates to all ancillary income such as licenses to other record labels, compilation deals and master licenses for synchronization (use of your recording in timed relation with an advertisement, film or video).

Third party revenues are commonly split 50%/50% and it is important you maintain this ratio, as well as to require the label to ask for your approval for all third party licenses. By putting in language similar to ‘subject to approval of Artist, not to be withheld unreasonably or untimely‘ you can make sure that you are not synced to a cigarette commercial or added to the next Tropical House Summer Hits Volume 200 CD.

Advances and Flat Fees

Advances are up-front payments on royalties, that are to be recouped from future earnings of the artist.

They are used to bridge the period before the first royalties come in, but also as leverage of labels to negotiate better deal points. By offering more money up front, they ask for higher reductions in artist and mechanical royalty rates.

The size of advances vary greatly between deals, depending on the label, selling power and clout of an act. If you can prove you consistently top charts and sell in the thousands, that should give you leverage to negotiate a large advance. For smaller artists without a track record, advances today are anywhere between $500 – 2.500 for singles and $2.500 – $7.500 for EPs.

A flat fee is a single payment used to buy off an artist’s ownership or revenue rights on a record. This is either done by considering the record a work for hire, or by a transfer of ownership. In either case, the label does not need to pay any future royalties.

This is common practice for remixes, where the labels are owners of the original records and the remixes are technically derivative works. Flat fees sizes greatly on an artist’ clout, ranging from $500+ for remixes of small electronic artists, to $10.000’s for ghost productions. I urge you to charge high for a transfer of ownership, as that is no small thing.

Accounting and Auditing

The accounting clause relates to the frequency and speed with which the label provides royalty statements and makes payments.

Most labels will account twice a year, at the end of June and December, with a 90 day term. Ideally, you want monthly accounting, however the frequency with which a label can account is tied to the speed of its distribution company. When dealing with majors, ask for quarterly accounting with a 45 day term to provide statements. With indies, inquire about the speed with which their distributor pays and push for monthly if possible.

Also you will want to add language that relates to the speed with processing of received invoices. Many majors intentionally leave out any language that commits them to paying any invoices within a certain period. Good phrasing is along the lines of ‘label will make any monies owed to artist payable within 30 days upon receipt of a valid invoice, to be sent to or postal address as specified above‘.

Deals should also include an auditing clause, which gives the artist the right to check whether the label has actually paid out the right amount of money and isn’t holding anything back.

Auditing clauses allow for an audit by a registered accountant of the artist’s choice, once a year, where the difference is paid back and if bigger than 10% the label covers the full costs of the audit. Many people do not know this, but auditing is actually very normal with bigger deals ($50.000+). Many major management companies and publishers send over accountants to labels on a yearly basis, without it being considered an insult to the audited party.

Assignment, Termination and Court of Law

The deal should also restrict the rights of assignment, which means the ability for each of the parties to transfer the rights granted in the record deal to another party.

Usually the label will ask to have right of assignment to subsidiaries, which is OK, if the label guarantees to uphold the terms of the record deal and maintain the best interests of artist. Ideally will be subject to prior approval too.

Also the agreement should cover incidents such as the label going bankrupt or either of the parties breaching the contract.

Language should be added that whenever a party is in breach, the other party has to notify the other, imposing a 30 to 60 day cure period within which the breach may be fixed.

In cases of bankruptcy or termination through a non-cured breach, the artist should have all rights returned within the fullest extent possible (respecting licenses that have already occurred, and such). This can be difficult when a label has already granted licenses to others (such as rights to distribute, to include on compilations or syncs to TV), which will then still be valid even if the rights transfer back to you.

Want to learn more about SoundCloud? Check out The SoundCloud Bible. The Third Edition has just come out and includes over 400 pages on growing your audience, SoundCloud trading, copyright and monetizing your music on SoundCloud, YouTube and elsewhere.

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