How to Protect My Rights in a Profit-Sharing Agreement

A profit-sharing agreement is a common way to collaborate on film projects, ensuring contributors share in the project’s financial success. However, without proper precautions, you could risk losing your fair share or becoming embroiled in disputes. Here’s how to protect your rights when entering into a profit-sharing agreement.

Key Steps to Protect Your Rights

1. Define "Profit" Clearly

Ambiguity about what constitutes "profit" is a leading cause of disputes. Ensure the agreement:

• Specifies whether profits are gross or net.
• Defines allowable deductions (e.g., production costs, marketing expenses).
• Provides transparency about how profits are calculated.

For example, "net profit" should list all expenses deducted, such as distributor fees and taxes.

2. Insist on Detailed Reporting

Regular financial updates are essential to track earnings and verify your share. The agreement should include:

• Frequency of reports (e.g., quarterly, annually).
• Details included, such as revenue, expenses, and profit breakdowns.
• The right to request additional documentation if needed.

3. Include Audit Rights

To ensure transparency, retain the right to audit the financial records of the project. The agreement should specify:

• When and how audits can be conducted (e.g., once per year with notice).
• Who bears the cost of audits (typically the requesting party unless discrepancies are found).
• Access to relevant books, records, and accounts.

4. Negotiate a Priority Recoupment Clause

To secure your investment, include a clause that prioritizes recoupment of your initial contribution before profits are split. For example:

• "Investor will recoup 100% of their initial investment before net profits are distributed."

This ensures you’re reimbursed early, reducing risk.

5. Specify Revenue Streams

Clearly outline which revenue streams are included in the profit-sharing agreement, such as:

• Box office revenue.
• Streaming and digital sales.
• Merchandising or spin-offs.

Exclude any revenue streams not intended to be shared (e.g., producer fees).

6. Cap Certain Expenses

To prevent excessive deductions from profits, consider capping expenses like:

• Marketing and promotional costs.
• Distributor fees.
• Producer salaries.

For example, you might agree that marketing expenses cannot exceed 20% of gross revenue.

7. Establish Dispute Resolution Mechanisms

Include a clause specifying how disputes will be handled. Options include:

• Mediation or arbitration before court proceedings.
• Jurisdiction and governing law (e.g., UK law or California law).

Clear dispute resolution terms reduce legal costs and delays.

8. Protect Intellectual Property Rights

If your contributions involve intellectual property (IP), ensure the agreement addresses:

• Who owns the IP created during the project.
• Your rights to royalties or derivative works.
• Limitations on how your IP can be used.

For example, specify whether you retain rights to license your work separately.

9. Ensure Proper Credit

Beyond financial terms, protect your reputation by including credit clauses, such as:

• On-screen credits (e.g., Executive Producer, Writer).
• Inclusion in promotional materials or festival submissions.

Accurate crediting enhances your visibility and career prospects.

10. Consult a Lawyer

Profit-sharing agreements are complex. A lawyer specializing in entertainment or business law can:

• Draft or review the agreement for fairness and legal compliance.
• Identify potential loopholes or ambiguities.
• Advocate for terms that protect your interests.

Common Pitfalls to Avoid

• Vague Definitions: Ensure every term, especially "profit," is well-defined.
• Insufficient Reporting: Avoid agreements that don’t require regular and detailed financial reports.
• Uncapped Expenses: Limit deductions to prevent unnecessary reductions in profit.
• Verbal Agreements: Always document terms in a signed, written contract.

Conclusion

A profit-sharing agreement can be a rewarding collaboration if your rights are protected. Focus on clarity, transparency, and accountability in the contract. By defining terms, securing reporting rights, and consulting legal experts, you can ensure a fair and beneficial arrangement.