Everyone in the entertainment industry is trying to raise money for their next project, whether it's a film, a TV show, or any other kind of content.
We've already looked in some detail at various kinds of debt financing, including tax incentives and pre-sales, and how to use those structures to raise production funding.
But while debt financing requires certain conditions to be met that not every project will qualify for, equity financing is something that practically every production can use.
Equity Financing In The Entertainment Industry
While the basic concept of equity financing in a film or TV show is quite straightforward, the term gets bandied about so much that many people in Hollywood take it for granted without understanding its true implications and some of its nuances.
In its simplest terms, equity financing is the ‘cold hard cash’ that you need to fund your production.
In return for this cash, you are offering equity investors a share of the project’s net profits that is proportionate to their investment.
Risks And Rewards
Equity financing is risky. But because of that, the rewards can be great.
As the equity investor owns a portion of the project and is a beneficiary of its net profits, they are extremely incentivized to find projects that they believe can make a lot of money.
When the project starts making money, the equity investor starts making money. And when the project starts making a lot of money, then the equity investor – unlike a debt financier – should also start making a lot of money.
But, of course, not all projects make money…
In order for an equity investment to prove successful, the film or TV show needs to be good enough to:
Attract distributors all over the world that want to acquire the licensing rights in their respective countries
Attract the general public to pay to see the finished product
If a project does not attract distributors, it cannot make money (as we discuss in our book on sales and distribution). This represents a high creative risk for the equity investor.
If the investor backs a project that doesn’t achieve distribution or prove a success with the paying public, then it has little chance of generating any revenues, and they face losing most or all of their investment.
This is not a good situation for the investor, and it’s not good for the filmmaker either, who now has an upset investor and a project that has lost money on their resume.
But, the higher the risk, the higher the reward...
If an investor backs a film or TV show that turns out great and becomes a huge hit, their share of the net profits could become extremely valuable. Successful equity investors can see their money doubled or even more when handled right.
This is why investors will pick their projects extremely carefully, and why a filmmaker or producer really needs to understand how the process works before trying to raise money for their production.
Who Needs Equity Financing?
Practically all projects - particularly independent films - will require some kind of equity financing.
For all its benefits, there is usually a limit to the amount of debt financing that any one production can raise for its budget. Usually, there will not be enough collateral to cover a production’s entire budget simply through debt.
There was a time, twenty or thirty years ago, when filmmakers were able to pre-sell their film, throw in some gap financing and a tax credit, and then they could finance 100% of their budget purely through debt.
This allowed them to retain all the equity in their project, which meant that they didn’t have to share any of the profits with anyone else. This was a tried a tested formula that made some producers and filmmakers very wealthy indeed.
Sadly, those days are pretty much over. As the bottom dropped out of the DVD market, coupled with a more conservative lending environment and an over-supply of product, it is far more rare to find a project that can be covered entirely by debt financing.
This means that, at some point, pretty much every independent filmmaker or producer will need to find investors who are willing to take a chance on their project's success at the box office and wider markets. They will need to find equity investors.
So, if YOU want to get your next project into production, you will likely need to understand how equity financing works, how to raise it, what to do with it, and how the hell to get it back to your investors.
Equity = Ownership
When you accept an equity investment, you are essentially giving away a little slice of the ownership of your project.
Not only does the investor take a share of the net profits, but they may also want to be involved in some of the creative and producing decisions. They will have the right to make their voice heard on how their money is being spent.
Not all equity investors behave in the same way or demand the same level of involvement. You need to understand an investor’s motivations and expectations before you accept a single cent from them. And you need to find an investor with whom you can be comfortable and establish a productive working relationship.
Once you accept an investment, you are going to be working with your investor closely for at least a couple of years. Look at your investor as a partner, rather than as a commodity.
Work with the wrong investor and you could be in for a tough time. But, if you get it right, you could have an investor who will invest in you and your projects for years to come!
To learn more about Equity Financing, and how to raise, invest, spend and return it, check out our book on the topic: HOW THE HELL… Do I Get My Film Financed: Book Three: Equity Financing by Ricky Margolis. For more information on other books in this series, check out all our current releases here.
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