Financing structures for plays and musicals are unique. While they are in some ways similar to motion picture financing, live theatre has its own set of customs and practices that can be confusing to first time investors. A client recently called to tell me that she had been offered ‘one-for-two terms on a front money agreement’ for a new musical that hadn’t been written.
“Yeah, but Dan” she asked, “What does that mean?”
What is front money? Front money is essentially first round, series ‘A’ financing for a live-theatrical venture. It is the seed capital used by producers to get a project on its feet, and most importantly, to a stage in the development process where a producer can seek to capitalize a commercial production. As such, front money may only be expended for pre-production expenses directly related to the development of the show, including option payments, key-creative fees, legal and accounting expenses, readings and workshops. Let’s say that all together, shall we – “front money is only for pre-production expenses directly related to the development of the show.” Unless specifically authorized in the front money agreement, which is rare, front money may not be used to cover the travel and expenses of the producer, nor the costs of wining and dining potential collaborators.
Who is a front money investor? Whereas a Broadway musical might have in excess of fifty individual investors, front money investors are a select group of individuals (under New York law, no more than five for any single production) who elect to take on increased risk for the possibility of a greater upside.
What’s the risk? A front money investment carries greater risk than a typical investment in a live-theatrical venture, which is already pretty substantial. Often a front money investment involves a project that has not secured a theatre, an opening date, key creatives or even a completed script. Whether or not the project will progress to the point of raising capital for a full production remains speculative, and thus front money investors generally expect more favorable deal terms for their contribution.
What’s the upside? Though riskier, front money investors get more bang for their buck. Often producers will reward early adopters with a profit participation in the producer’s share of net profits, as opposed to merely the investors’ share of net profits. You might have heard discussions of “one-for-one” or “one-for-two” deals. These are the types of terms offered to front money investors (stay tuned for my next blog post where I will discuss how a “one-for-one” or “one-for-two” actually works).
What do investors sign? A front money investor will sign a front money agreement with the producer. Thereafter, the producer will be authorized to use the funds to develop the show. Once the show is ready for its first commercial production (if ever), the front money investor will become a member of the production entity used to capitalize the first commercial production of the show. Typically, the front money agreement will contemplate the investor automatically rolling-in to the production entity, and thus their front money investment will be deemed an equity investment in the production entity.
While often shorter in length, front money financing agreements govern a (hopefully) longstanding relationship between producer and investor. As such, they are fundamental documents that require careful review and consideration.