For those of you contemplating investing in commercial theatre, you are bound to hear of the phrase “One for One”, “One for Two” or “One for Three” bandied about in co-producer negotiations. These are deal terms accorded to co-producers or early investors to induce them to come onboard in a more meaningful way than a standard investment. You might hear a lead producer rattling off these deal terms like footy scores (I’m Australian, I can say footy) or categorizing groups of investors as “the one for three pool.” For first timers these terms are confusing, but the truth is they describe a very simple concept.
Set your stopwatch to 190 seconds – let me explain.
- A traditional financing structure for commercial theatre (be it musical or legitimate stage play) divides a production’s net profits as follows: (i) 50% becomes the Producer Share; and (ii) 50% becomes the Investor Share.
- So, if the production makes $50 worth of net profits, $25.00 will be allocated to the producers, and $25.00 will be divided among the investors, pro rata in the proportion that each investor’s investment bears to the aggregate of all investments.
- But what about investors who are early adopters of the production and take the greatest amount of risk (i.e. front money investors) or those co-producers who bring a cohort of investors to the table? How are they compensated for their contributions to the production?
- Enter, the One for One/One for Two concept.
- THE ONE FOR ONE: An individual receiving 1:1 terms has the strongest deal. This means that for every 1% of the net profits they receive from the Investor Share, they will receive 1% from the Producer Share. ONE – FOR – ONE.
- THE ONE FOR TWO: second best to the One for One. For every 1% of the net profits an investor receives from the Investor Share, they will receive 1/2% from the Producer Share.
- THE ONE FOR THREE: third in line but a Metziah* nonetheless. For every 1% of the net profits the investor receives from the Investor Share, they will receive 1/3% from the Producer Share, and so on…
- Let’s play with an example:
Fox Rothschild: the Musical tells the inspirational story of a Philadelphia-based law firm set to 70’s disco hits. The production capitalizes on Broadway at $8 million. Ms. Fox is the lead producer on the project and brings in two investors, Devyn and Veronica. Mr. Rothschild is an associate producer, and brings in one investor, Yvette.
- Like many productions, Fox Rothschild: the Musical distributes net profits in accordance with the following: 50% to the Producers and 50% to the Investors
- Devyn invests $4 million in the project and negotiates a 1:1 deal for her investment.
- Veronica invests $2 million in the project and receives a 1:4 deal.
- Mr. Rothschild does not raise any money, but is accorded 1:2 terms on all the money he brings in.
- Yvette invests $2 million in the project but does not receive any special deal terms.
The production is a runaway hit and starts distributing net profits. How are these divided?
- At $4 Million, Devyn invested 50% of the total capital for the production and is therefore eligible to receive 25% of net profits in her capacity as an investor. However, owing to the fact that she was accorded 1:1 deal terms, she will receive her standard 25% from the Investor Share in addition to a full 25% from the Producer Share. Devyn’s aggregate net profit participation is 50%.
- At $2 million Veronica has invested One-Quarter of the total capital for the production and is therefore eligible to receive 12.5% of net profits in her capacity as an investor. However, owing to the fact that she has received 1:4 terms, she will receive her standard 12.5% from the Investor Share, and 3.125% from the Producer Share. Veronica’s aggregate net profit participation is 15.625%.
- At $2 million Yvette has invested One-Quarter of the total capital for the production and is therefore eligible to receive 12.5% of net profits in her capacity as an investor. Remember, Yvette did not receive any special deal terms. Yvette’s aggregate net profit participation is 12.5%.
- Mr. Rothschild did not raise any money, but is accorded 1:2 terms on all the money he brings in, i.e. Yvette’s share. As such, Mr. Fox will receive 6.25% from the Investor Share. Mr. Fox’s aggregate net profit participation is 6.25%.
- But what about Miss Fox? While Miss Fox did not invest any money herself, she will receive the remainder of the Producer Share, less those percentages allocated to investors/producers from the Producers share, i.e. 15.625%. Miss Fox’s aggregate net profit participation is 15.625%.
- Double checking our math: 50% + 15.625% + 12.5% + 6.25% +15.625% = 100%
See? Not as hard as you thought.
*Metziah – Yiddish. “A good deal.”