$750,000 for 50% of an emerging record company? WWYD

[vesper_dup1]

A venture capital investment group has just offered to finance my emerging production/record company by offering to cover my $750K expansion costs. The assets of the business includes a beautiful very well equipped state-of-the-art recording facility, as well as an existing stable of seven signed artists with completed album projects that focus groups have indicated to us as being truly hot and commercial. My company also consists of a team of 5 top notch producers. I need the finances to market these projects as well as to develop others. However, they've asked for 50% ownership of my business.

 

What would you do? Would you do the deal?

[Philip OKeefe]

Do you want to retain control? I wouldn't really want to give them more than 49%... and even that is going to depend on the deal's particulars.

 

FIRST thing I'd get is a lawyer. A GOOD one.

[vesper_dup1]

Thanks Phil for the reply. I have a very experienced lawyer who has literally done thousands of these types of venture capitalist deals, and I plan to negotiate strongly.

 

My question really is this: If push comes to shove, and they said take it or leave it, would you consider doing this deal?

[Valkyrie Sound]

Well..... the fact that you've actually found someone in this day and age that will invest in a record company..... wow.

 

Given the large financial risk that this person is willing to take 50% doesn't seem so bad. It IS a very big risk in this state of the industry.

 

However, if you go ahead with the deal MAKE SURE you have a very clear system of resolving disputes between yourselves. Who breaks the tie when you have different views on a business issue?

 

Good luck....

Valky

[Valkyrie Sound]

Originally posted by vesper:

 

My question really is this: If push comes to shove, and they said take it or leave it, would you consider doing this deal?

Really.... what do you have to loose?

 

What's your personal investment in this company?

[vesper_dup1]

What's your personal investment in this company?

$350K

 

I really don't have a problem with the issue of a tie in the board room. These guys are really experienced and saavy business professionals with some other resouces and key contacts that could prove to be very helpful to the business. In the event of a tie I think that we can keep at it until we come up with a compromise solution to the issue. In the past I have served on boards with an odd number and there always seemed to be one constant fact: When there was a split on an issue,we were always forced into a result; often we were wrong, as we were not forced to keep negotiating and working at it.

[djwayne]

Exactly how is the $750,000 to be spent ?? Once that is gone, in a worst case senario, what happens to your $350k worth of stuff ??

 

Did you approach them , or they approach you ??

[Duddits]

I know I may just be a cat, but it seems to me as if you're not seeking advice as much as justification for the decision that you have already made to take the deal.

 

The fact that you used focus groups to evaluate your artists gives me paws (get it! Pause/PAWS aha aha ah ah aha h),

 

Nonetheless, from the few details you've provided, it sounds like you should take the deal. However, I'd insist on being the President and CEO so that in the case of a 50/50 split, your vote wins.

[vesper_dup1]

Originally posted by djwayne:

Exactly how is the $750,000 to be spent ?? Once that is gone, in a worst case senario, what happens to your $350k worth of stuff ??

Very carefully. It will be spent according to a very detailed master budget. Actually, I only need $500K, $250K is a built in contingency that makes them more comfortable.

 

Did you approach them , or they approach you ??

They approached me. However, I have been prepared for a VC group to approach me for some time. My bus plan and pro forma financials were ready to be examined, after the signing of a No Diclosure of course.

[vesper_dup1]

Originally posted by Duddits:

...it seems to me as if you're not seeking advice as much as justification for the decision that you have already made to take the deal.

 

The fact that you used focus groups to evaluate your artists gives me paws (get it! Pause/PAWS aha aha ah ah aha h),

 

Nonetheless, from the few details you've provided, it sounds like you should take the deal.

Actually, I haven't decided whether to take the deal. 50/50 gives me paws (ha ha ha). I think that I can negotiate that and some other aspects of the deal.

 

Why do you think I should take the deal?

[djwayne]

I'm no great business expert, but I'd be very leary of any plan to spend big bucks in the music business, unless I was very confident of my talent and the talents of the artists, and even then, it's still a big gamble with no guarantees. You could even become the president of your own record company with a salary of $1.00 per year. Personally, I'd try to find another way to implement my business plan, with as little expenses as possible. But then again, not knowing all the details of the business plan, or opportunities this may bring for you, I really can't give you advice, other than talk very long and hard with your personal lawyer, an entertainment lawyer who specializes in entertainment law, an accountant, and a banker, to be sure you understand all the implications.

 

That's my two cents.

[vesper_dup1]

Originally posted by djwayne:

I'm no great business expert, but I'd be very leary of any plan to spend big bucks in the music business, unless I was very confident of my talent and the talents of the artists, and even then, it's still a big gamble with no guarantees. You could even become the president of your own record company with a salary of $1.00 per year. Personally, I'd try to find another way to implement my business plan, with as little expenses as possible. But then again, not knowing all the details of the business plan, or opportunities this may bring for you, I really can't give you advice, other than talk very long and hard with your personal lawyer, an entertainment lawyer who specializes in entertainment law, an accountant, and a banker, to be sure you understand all the implications.

 

That's my two cents.

Unfortunately, it does cost money to really make it in the music business and my money is aleady committed. What I'm considering is do I use someone else's money to expand my business, and at what cost am I willing to do it? These guys are so wealthy it's amazing. The poorest one is worth over $10 million liquid, the wealthiest has a net worth of over $100 million, and is very liquid as well.

 

My business plan and model is top notch, and they recognize that it is. My artist roster is awesome and my production team is credible. I am growing my business with as few expenses as possible. In fact, $750k is not alot of money. At $750k I'm really bootstraping it.

[YourMotherShouldKnow]

good luck wit it Vesper. I don't have enough information here to give you a thumbs up or thumbs down.

 

Who are these artists? Is one of them Norah Jones? Sarah McLachlan? Jessica Simpson? If so, then, negotiate a better deal. If's it's a VC deal then I expect the growth of the venture is fairly risky and the artists are themselves risky. So it'd be tough to negotiate a better deal when they are putting so much at risk.

[LiveMusic]

What genres? Are you to compete with major labels in traditional ways? Not that I have any answers but they seem like good questions. 3/4 mil is chicken feed for several acts, right? I dunno... with the industry being so squirrelly, not knowing other details, I'd probably take the moola and yeah, use their money.

[vesper_dup1]

Originally posted by LanceMo:

good luck wit it Vesper. I don't have enough information here to give you a thumbs up or thumbs down.[/qbThank you. In general, how do feel about a 50/50 deal ? Remember, they came to me.

 

[qb]Who are these artists? Is one of them Norah Jones? Sarah McLachlan? Jessica Simpson? If so, then, negotiate a better deal. ]

The focus groups have indicated that the potential in my artist stable is phenomanal. So a better deal is in order. In fact, I'm pretty certain that they expect me to negotiate the 50/50 offer.

[djwayne]

Originally posted by vesper:

Originally posted by djwayne:

I'm no great business expert, but I'd be very leary of any plan to spend big bucks in the music business, unless I was very confident of my talent and the talents of the artists, and even then, it's still a big gamble with no guarantees. You could even become the president of your own record company with a salary of $1.00 per year. Personally, I'd try to find another way to implement my business plan, with as little expenses as possible. But then again, not knowing all the details of the business plan, or opportunities this may bring for you, I really can't give you advice, other than talk very long and hard with your personal lawyer, an entertainment lawyer who specializes in entertainment law, an accountant, and a banker, to be sure you understand all the implications.

 

That's my two cents.

Unfortunately, it does cost money to really make it in the music business and my money is aleady committed. What I'm considering is do I use someone else's money to expand my business, and at what cost am I willing to do it? These guys are so wealthy it's amazing. The poorest one is worth over $10 million liquid, the wealthiest has a net worth of over $100 million, and is very liquid as well.

 

My business plan and model is top notch, and they recognize that it is. My artist roster is awesome and my production team is credible. I am growing my business with as few expenses as possible. In fact, $750k is not alot of money. At $750k I'm really bootstraping it.

They are wealthy for a reason, they may be smarter than you, and have their own plan. $750,000 is a lot of cash, and plans can backfire.

Here again, I would slowly grow the company using earned profits to expand, rather than borrow, or seek investors, but that's me. You may have more information that makes you more confident. Again, I would say to seek council, from specialists who would be familiar with ALL the details, and legalities involved.

[vesper_dup1]

Originally posted by LiveMusic:

3/4 mil is chicken feed for several acts, right?

Only if you're trying to promote nationally...hint.

 

... I'd probably take the moola and yeah, use their money.

Thank you. A definative opinion.

[vesper_dup1]

Originally posted by djwayne:

They are wealthy for a reason, they may be smarter than you, and have their own plan. $750,000 is a lot of cash, and plans can backfire.

Now, this is interesting. I know for a fact that they are smarter than me. Definately a very sophistacated bunch, with tons of experience. This is why I posed the question. The offer of an investment so close to the "control" margin percentage i.e. 50/50, 49/51, even 60/40 poses risks of dilution etc, especially if the greed monster shows up.

 

Please, tell me more of what you had in mind when you said that they may be smarter than I. Elaborate on what you could imagine their plan being. What I really am doing is gauging what their long and short-term motivations may really be.

[LiveMusic]

No way we could tell what their motivation is.

 

Years ago, I was involved in oil and gas exploration. I got some investors but I also put a HUGE chunk of my own money in for every well. I hit it big and lived high for years and then the crash came. But in the end, I would have been much better off to promote every deal. Meaning, always have outside investors and as little of my own money involved. Because it's a very risky business.

 

Sure, I hit the home run and that was awesome. But then I hit the dogs later. Using my own money. And that wasn't good. Very rich people are accustomed to crapshoots. It doesn't even affect them.

 

Similar industries, very similar in fact. Numerous "contractors" used for every exploration project, huge risk and huge returns possible. And full of liars and sharks 'round every bend.

[techristian]

This is a very tempting proposition. However because you already have $350,000 invested you still have much to loose.

 

In the business deals that I have been involved in, the only time the investor gets 50% is if they put in ALL OF THE MONEY (and I put in all of the work.)

 

Will they actually put $750,000 in your hands, or just $750,000 worth of "stuff", such as some non tangible assets. Perhaps they own a percentage of a few UNKNOWN ARTISTS or some other type of questionable asset, such as a piece of "prime real estate" in a business district. Will they force you to hire their in-laws and relatives into high paying positions?

 

HAVE YOU SEEN THEIR BUSINESS PLAN??

 

I don't know. Maybe I'm too cynical.

 

By any chance did these guys first contact you through EMAIL?

 

Dan

 

http://teachmedrums.com

[djwayne]

Well, I don't know the people in question, so I'd have a question on their motives of investing $750,000. Are they fair and honest business men, looking for a fair return, or have they developed a plan to relieve you of your $350,000 investment and your stake in the artists ?? All totaled, you have a company worth $1,100,000. Their percentage on it all is approx. a 68% investment for a 50% stake, your investment would be around 31% of the company's total worth, and you'd recieve a 50% share. Sounds like a great deal for you, but is it ?? Are they selling or supplying you anything, such as advertising, web services, management fees...??

 

How would they react if all was lost ?? Big deal ?? or no big deal ?? Are they experienced at all in the entertainment business ?? What else are they bringing to the table besides money ?? This can become a very complicated deal fast, and that's why I suggest working closely with YOUR own lawyers. Your lawyers will know the details, and possibilities, good and bad.

[vesper_dup1]

Originally posted by techristian:

This is a very tempting proposition.

In the business deals that I have been involved in, the only time the investor gets 50% is if they put in ALL OF THE MONEY (and I put in all of the work.)

Makes sense to me. Also, I get paid a handsome salary.

 

Will they actually put $750,000 in your hands, or just $750,000 worth of "stuff", such as some non tangible assets. Will they force you to hire their in-laws and relatives into high paying positions?

$750k cash plus some other very valuable resources that I can not mention. No nepotism allowed.

 

HAVE YOU SEEN THEIR BUSINESS PLAN??

 

By any chance did these guys first contact you through EMAIL?

Actually they heard about me thru a mutual business contact who thought that they should come see my operation and review my business plan. They contacted me directly.

[Philip OKeefe]

Breaking a single band, at the national level, is going to normally cost more - a lot more - than your $750K budget... and breaking a stable of bands is going to cost even more than that. I have no ideas what your plan is, or the genre, or the end goals, but I can see where they might have felt $500K was too low...

[vesper_dup1]

Let me change the scenario just a little bit. What if they wanted to loan me the money? How would that alter your peception of what their equity should be.

 

Again, just for the record, I have a very competent lawyer working on this for me. I just want opinions of the people of the forum.

 

How would they react if all was lost ?? Big deal ?? or no big deal ??

We would all walk away losers. Oh, well.

[vesper_dup1]

Originally posted by Philip O'Keefe:

Breaking a single band, at the national level, is going to normally cost more - a lot more - than your $750K budget... and breaking a stable of bands is going to cost even more than that. I have no ideas what your plan is, or the genre, or the end goals, but I can see where they might have felt $500K was too low...

I agree, Phil. That's why our plans are not even to attempt to break an act nationally. Our focus is to cultivate a core market/region only, and then let other opportunities manifest themselves as we experience success in our core market.

[djwayne]

A "loan" is a whole different story, you're expected to pay it back with some sort of interest. You could end up indebted to them for life, depending upon the details of the loan, and your success.

 

I don't want to be overly pessimistic, just cautious. Sometimes deals like this can work out great for everybody. It depends on the people involved. Who knows, maybe they can pull a few strings and make things happen for you and your artists.

 

A 50 % piece of a big pie is better than a 100 % of no pie.

[techristian]

AN ARTICLE THAT YOU MAY WANT TO READ

 

And another article that may be of interest to everyone else here !

 

http://www.cix7records.com/independence.html

[DallasPA]

Vesper,

 

I just have a few comments and hopefully you will find them helpful. I am speaking from experience so please forgive me for such a long post. First I would like to congradulate on finding investment capitol for a record label in this day and age.

 

From experience, once you sign the deal you will incorporate, and positions will be handed out, do you have enough business minded people in your camp to house most of the executive positions are will they. If they do, what happens when the force play occurs, and basically they pull the coup using your producers and artist, yes you may still be their but if your out numbered your power will slowly be stripped from you over time. How will you prevent this.

 

I dont think that 750K is a lot for what they may be asking, for example:

 

Lets look a a not so modern day example back in 1993 Sean Combs was given a label deal via Arista, if I'm not mistaken the structure of this deal was 2.5 million dollars over 3 years. Basically over 800K per year. Why do I mention this, I think it gives a great example of what it takes to succeed as an up start.

 

First, this was 1993, I would think that 800K went a lot further in 1993 then 2004.

 

Second, Rap is probably the least expensive and fastest genre to recoup your funds from and Puff was given 800K a year back in 1993 for a Rap label.

 

Third, Puff's first 3 artist when at least Gold, and I think 4 out of 5 of those first albums went Platinum and this was with a major backing promotion and distribution. With cheap music videos running 100-200K you certainly can't afford a flop early on!!!!!!!!

 

Fourth, Puff had a franchise artist, you mention that you have a stable of great talent, 7 acts to be exact. But the big question is do you have a franchise artist. What is a franchise artist, by my definition its an artist that within the next 5 years has a 95% chance to land a record deal with a Major no matter whoooooooo they were affialiated with. And believe me they are not easy to find.

 

There are a few things I would be concerned about one is the $750K investment, what is the make up, is it all cash, a fundable letter of credit, line of credit or what. How easy will it be for you to get your hands on the money when you need it is probably one of the more crucial questions. If you need to dump 125K right now into promoting an artist and it comes 30 days latter that can be the kiss of death.

 

Second, some venture capitol deals are structured so the investors recoup their original investment, with interest within a certain period say 3-5 years; while maintaining a portion of the company. I hope yours isn't structured in this fashion!!!!!!!

 

Third, I think you need to really look at what will happen if the joint venture goes belly-up do you lose your studio and equipment in the process??? I think you need some type of contingency built in that minimizes your risk

 

Just some things to think about!!!

 

If your studio is well equipped, and your artist and producers are hot, and the product is ready to go, why not hire a top notch attorney and get a PDM deal (pressing, distribution, amd marketing). These type of deals are definitely out there!!!!!!!!!!

 

If everything is as you describe I think you may be selling way to cheap!!!! I might give 10-15%, put their money in the bank to tip the balance sheet, and use the other 20-25% of the compnay to raise an additional 1-2 million dollars!!!

 

Dallas

[Rog]

Hmm, why do these guys want to buy into your business?

 

If they know what they're talking about they'd have to be crazy to invest in the music business. There are WAY easier and more secure investments out there.

 

This makes me think they want to throw a bit of change your way so they can play at the music game, in other words, a bit of a vanity project. It happens, some people make their fortune and decide they want to be involved in a football team or a recording studio ... it's ego over prudence but they're wise enough to know that.

 

Trouble is that these people like to get involved in the running of the show, which can be a bad thing.

 

Obviously, I'm generalising but I've seen this kind of thing happen.

 

If you go through with it, make a watertight agreement about the limits of their involvement in the day to day running of the business.

[vesper_dup1]

Originally posted by DallasPA:

Vesper,

 

I just have a few comments and hopefully you will find them helpful. I am speaking from experience so please forgive me for such a long post. First I would like to congradulate on finding investment capitol for a record label in this day and age.

I think this post has been one of the most insightful yet. Thank you.

 

From experience, once you sign the deal you will incorporate, and positions will be handed out, do you have enough business minded people in your camp to house most of the executive positions are will they. If they do, what happens when the force play occurs, and basically they pull the coup using your producers and artist, yes you may still be their but if your out numbered your power will slowly be stripped from you over time. How will you prevent this.

Actually my entire executive team is in place, and has been for almost a year. And, they are very experienced in the music business. No outsiders allowed. The VC group was very impressed by this.

 

I dont think that 750K is a lot for what they may be asking...

I agree. That's why I wanted to check the thoughts of others. I'm not into deluding myself.

 

...for example: Lets look a a not so modern day example back in 1993 Sean Combs was given a label deal via Arista, if I'm not mistaken the structure of this deal was 2.5 million dollars over 3 years. Basically over 800K per year. Why do I mention this, I think it gives a great example of what it takes to succeed as an up start.

 

First, this was 1993, I would think that 800K went a lot further in 1993 then 2004.

 

Second, Rap is probably the least expensive and fastest genre to recoup your funds from and Puff was given 800K a year back in 1993 for a Rap label.

 

Third, Puff's first 3 artist when at least Gold, and I think 4 out of 5 of those first albums went Platinum and this was with a major backing promotion and distribution. With cheap music videos running 100-200K you certainly can't afford a flop early on!!!!!!!!

GREAT EXAMPLE!

 

Fourth, Puff had a franchise artist, you mention that you have a stable of great talent, 7 acts to be exact. But the big question is do you have a franchise artist. What is a franchise artist, by my definition its an artist that within the next 5 years has a 95% chance to land a record deal with a Major no matter whoooooooo they were affialiated with. And believe me they are not easy to find.

Actually, we've been very careful in our talent selections, and I believe, and the focus groups have indicated, that we have several franchise artists. We're in Memphis, and here's something to think about: Memphis had eight acts to make it to the top 40 in last year's American Idol, six to make it to the top 32, and one to the finals. There is some awesome talent here. Every one of our acts is mainstream ready, and our whole point is position them and the company to be attractive to the industry, i.e. the major distributors/labels.

 

There are a few things I would be concerned about one is the $750K investment, what is the make up, is it all cash, a fundable letter of credit, line of credit or what. How easy will it be for you to get your hands on the money when you need it is probably one of the more crucial questions. If you need to dump 125K right now into promoting an artist and it comes 30 days latter that can be the kiss of death.

 

Second, some venture capitol deals are structured so the investors recoup their original investment, with interest within a certain period say 3-5 years; while maintaining a portion of the company. I hope yours isn't structured in this fashion!!!!!!!

 

Third, I think you need to really look at what will happen if the joint venture goes belly-up do you lose your studio and equipment in the process??? I think you need some type of contingency built in that minimizes your risk.

These are all key issues that my attorney and I are working out my position on. I'll keep you posted. Liquidity and cash flow would be ahuge concerns.

 

If your studio is well equipped, and your artist and producers are hot, and the product is ready to go, why not hire a top notch attorney and get a PDM deal (pressing, distribution, amd marketing). These type of deals are definitely out there!!!!!!!!!!

That's Plan C. Can't tell you what Plan B is yet, it's a secret.

 

If everything is as you describe I think you may be selling way to cheap!!!! I might give 10-15%, put their money in the bank to tip the balance sheet, and use the other 20-25% of the compnay to raise an additional 1-2 million dollars!!!

In my experience VC's generally don't like to hear that you're going to use their money to get other people's money. But that is a legitmate consideration.