Control vs flexibility – An investor will often want (and be used to) various controls in a joint venture. These will not always be possible in the same way as they might in a non-music industry joint venture, as artists/managers/entrepreneurs will need creative flexibility.
Due to the difficult balance of control and flexibility, an investor ultimately needs to be happy that the right team is in place. Connected to this is to what extent the investor should retain control over the use of funding?
Securing the relevant rights – It is important to identify what assets/rights are needed e.g. recording, publishing, merchandising, live and make sure that these are in the company that is being invested into or that the company is the sole beneficiary of the revenue stream, relating to those rights.
This sounds obvious, but rights may often be in a mixture of different companies, partnerships or in the hands of individuals, and there may be restrictions in the relevant agreements on assigning these.
Due diligence is essential to ensure that you are actually investing in what you think you are. Connected to this is whether the joint venture entity needs the rights themselves or just the income streams that result from them.
Creative vs business approaches – Investors may not have the same comfort they might do in entering into deals outside of the creative industries. For example, there may not be the same documentation an investor might be used to, in terms of business plans and management accounts etc and company books may be out of date or non-existent and filings incomplete.
This is particularly the case where a company may have been used as a “lifestyle” company. However, this is one of the reasons where an investor can add value and make a business even more profitable.
Imposing a record deal structure on a corporate structure – Often individuals will see doing a corporate deal through the eyes of their experience of doing record or publishing deals.
For example, they will ask how they will recoup the money paid for their shares as if the price paid were an album advance, without realising that the price paid is for the shares themselves and their “recoupment” will happen when the Company makes profits or they exit.
Whilst this may not be how the investor sees things, the investor needs to be aware of this approach so they can understand where their proposed business partner is starting from.
Playing with the share structure – Individuals not accustomed to corporate transactions will often suggest structures which, although not impossible, may cause them more problems than they might have anticipated.
Whilst it may not be the investor that is suggesting these structures, investors should be aware of them as potential hurdles. For example:
Shares for free – Individuals will often ask for shares for free or at nominal value, either on entry into the venture or upon certain milestones during the venture. This can have significant tax implications for the individual where the company has an existing value and/or where the issue of shares is related to employment.
Return of shares – Individuals will often say that they “want their shares back” on specified events (such as the end of a distribution deal connected to the joint venture) or at some point in the future (such as repayment of a loan by the investor), which requires putting in place option / buy-back arrangements.
This will most likely involve a payment by the individual to reacquire the shares (which the individual will often not have anticipated), or if shares are to be reacquired at nominal value, may involve tax and legal issues that need to be mitigated.
Additional shares – Individuals may say that if certain milestones are reached, they want their shareholding to increase. Whilst this is possible from a corporate perspective through the use of ratchets or reverse vesting of shares, it will depend on the level of investment in the deal as to whether the transaction warrants this level of complexity and the necessary professional fees to put the structure in place.
Tax reliefs – It is important for the investor to take good tax advice in structuring, as this may allow significant tax savings through the use of reliefs such as entrepreneur’s relief and EIS relief, either upon entry or exit from the venture.
If it is done correctly, the pitfalls can be negotiated and risks reduced. Whilst the industry may be in a constant state of change, this presents opportunities which make overcoming the challenges worthwhile.