Financing Your Creative Project
Often, creative entrepreneurs are seeking funding for their projects. Whether it's a film or another type of creative endeavor, figuring out the best way to finance your project can be a challenge. Here are a few things to consider when deciding how you want to pursue funds.
Equity Financing: Equity financing involves raising capital by selling an ownership stake in your project to investors. In return, those investors gain a share of potential profits and might also have influence over the creative and business decision-making in your project. You can finance your project through equity financing by either targeting individual investors, or by opting to get funding from a large group of people through equity crowdfunding.
The first thing to know is that these are general “investment contracts” and will require compliance with securities laws and regulations, including necessary disclosures and filings. It's generally a complicated and expensive process. And while this can provide the funding you need, it also means you are giving up equity (and maybe some control) in your project.
For filmmakers, this has long been a popular route to obtain funding. In return for funding, financiers generally get "points" in the project. A point represents an ownership percentage in the project, typically based on the “net profit” the project generates. The definition of net profit can vary by industry and project type (and can be unique to the specific project) but generally, net profit is calculated after the project’s gross receipts are collected, then, the distributor takes their cut, the costs of production are recouped, certain fees are paid to producers and other costs based on the project type are paid out of those gross receipts. Only after all these costs are covered are the financiers in a position to see profits.
While individual investors may understand this dynamic before even seeing the specifics in the investment contract, if you chose to get financing from multiple people through equity crowdfunding, it is especially important to think about how to clearly communicate this complexity with your investors. Many investors might not understand the nuances of your industry, as for example, getting a film distributed does not necessarily mean it is suddenly a profitable film. Clear communication is the best way to make sure investors aren’t asking for their money long before your project is actually profitable.
Reward-Based Funding: Reward-based crowdfunding platforms (think Kickstarter), allow creators to raise funds by seeking small contributions from a large number of backers. This method is beneficial if you're looking for contributions from a wider audience rather than an individual or small group.
Unlike equity financing, contributors do not get equity in the project. This means you don't lose any ownership of your project, generally don’t have to give up creative control and face fewer regulatory hurdles. Contributors often receive a "gift" as a token of appreciation, which can range from early access to the project to tangible items. This gesture can also serve as legal consideration for the contribution.
Reward-based crowdfunding is popular not just because it involves fewer regulatory hurdles and legal complexities as compared to equity financing, but it is often a faster and more accessible process, especially for smaller projects. It also helps build a community of supporters and fans who are emotionally invested in the project's success, providing early marketing momentum and valuable feedback.
Choosing the Right Platform and Service: Once you’ve decided what type of funding you want, it’s also important to consider which service or contractual arrangement to use. Online platforms have their own sets of rules and requirements, and sometimes, these are buried in their Terms of Service. By using a particular service, you may be agreeing to give away certain equity or profits in your project, so make sure you read the fine details before using a service.
Need legal assistance? Choosing the right funding method is crucial for the success of your project. Whether you go with equity financing or reward-based funding, understanding the implications and requirements of each can help you make an informed decision. Need guidance with funding? Contact Think Creative Legal today to schedule a consultation and discover how TCL’s expertise and proactive approach can benefit you and your business.
The foregoing is not legal advice and is meant for informational purposes only.
