What To Consider in Record Deals

We have no doubts that any musician out there understands the intricacies and seriousness of record deals. Just like any other contract, a record deal legally binds the parties involved — in this case, the creator and the recording company (whether small or large, indie or major). It spells out the business specifics, rights, and obligations and lays the foundation for the future partnership. It also specifies the conditions under which the contract can be terminated.

Among some of the most frequently discussed aspects of a record label deal are contract terms, revenue share, territory, and exclusivity. However, in most cases, there are many more underlying terms and mechanics to consider. Additionally, the type and the number of these so-called ‘commercial clauses’ may vary greatly, depending on an almost-crazy variety of reasons and conditions.

First of all, the type of the label is a significant indicator — meaning whether it’s rather small or big, and whether it’s a major label, its subsidiary, or an independent label. Naturally, it also depends on the artist, what they bring to the table (their experience), and how attractive they are to the label.

• Are they an emerging or relatively established artist?

• Do they already have a track record of music sales?

• Do they bring an already existing audience to the table?

• Do they have co-signs from notable writers, producers, artists, etc.?

• Does the label’s A&R have a particular trust in the artist’s music?

• Are the label’s executives personally interested in the deal?

These are only a few questions that might be considered and can shape a deal with a record label.

Now that we have some insight into the challenges of signing with a record company let’s explore the most important aspects of a record deal.

The ‘territory’ in a record deal refers to all global regions where your music will be commercially released — meaning where the label will distribute, market, and profit from your work and thus control the rights to your music. Typically, a contract will simply state ‘Universe’ to indicate worldwide release

However, some labels, though rarely, are focused on specific areas, which can be beneficial if you want to tackle a particular market.

Rights encompass all the ways a label can legally profit from, use, and/or control your music. This might include streams, downloads, sales of physical records, cover songs, official artist videos, photos, logos, cover artwork, artist name, merchandise, sync licenses or sub/licenses, live performances, tours, and more, especially in 360 deals.

One of the most paramount mechanics of a record label agreement is the term duration. Generally, a contract term or contract period refers to the duration during which the artist is (usually exclusively) bound to the label. The contract term period typically ranges from 1-3 years for young artists or those just starting out. Long-term agreements, which can be 5-10 years long or longer, are usually offered to more established and accomplished musicians or those with a successful track record.

However, there might be more layers to the ‘contract term.’ Once again, not every record deal has to be structured this way, but it may be beneficial to at least know about and comprehend this possibility. Oftentimes, there is an ‘initial contract period’ (“First Contract Period”), which refers to the time it should take to produce, deliver, market, and sell an artist’s first EP or LP. Afterward, the contract may specify ‘separate and successive irrevocable options’ that the label can exercise should it choose to activate a second, third, fourth, or x contract period. That is, of course, only if you grant the possibility of options to the label. If this is the case, options are then created specifically by the label.

Options designate the right of the label that releases a record to release the subsequent record(s). There may be different reasons why a label will pick up their option. Usually, it is because the initial release has met financial and/or cultural objectives, the label believes in the artist despite the weak commercial performance, or (and yes, that can happen, too) the label wants to drop the artist but doesn’t want another label to sign them. Of course, the label can also choose not to exercise one of its options, upon which the contract terminates.

It is also important to note that while some labels, mostly independent ones, will likely offer musicians contracts that are more artist-friendly and considerate, other labels may still employ contracts that are very one-sided. In the most binding record deal arrangements, the artist may be locked in for years, obligated to produce music under the label even if things get uncomfortable and the artist doesn’t want to stay signed to the label any longer

Besides options, a contract term may also include ‘extensions.’ This term refers to the prolongation of the deal caused by the artist not paying the label back. In other words, extensions refer to the time it takes to recoup anything that needs to be recouped if the music hasn’t turned profitable.

Exploitation period
Sometimes, labels differentiate between the contract term and the so-called ‘exploitation period,’ the time during which the label has the right to distribute, market, sell, and profit from the recording made under the agreement. In other words, it is the period during which the label controls the rights to your music. Some deals may state their exploitation period as perpetual. For this reason, it is crucial that you’re aware of the exploitation period mentioned in the contract and negotiate it upfront.

With traditional releases, like physical copies or downloads, the sales curve goes up really quickly immediately after the release and then goes down again. In those cases, there’s no need to grant your label a long exploitation period. This especially applies to the electronic music industry, where releases are generally based on singles rather than full albums.

The situation can be a little different when it comes to streaming and playlist curation. Playlists, if popular and curated well, have the potential to boost a track and thus generate a great amount of streams. In that case, it might be useful to grant a label a longer exploitation period and benefit from the label’s marketing power and promotional efforts.

However, generally speaking, a long exploitation period offers little advantage to the artist, especially in 360 deals and other agreements that tend to favor the label over the musician.

It’s important to remember that many record labels also take a passive share of the artist’s live income, as well as a portion of earnings from merch, sponsoring, and advertising. The shares resulting from these rights have to be paid to the label during the contract period. It is thus recommended, particularly for up-and-coming artists, to negotiate shorter exploitation periods. This ensures that labels don’t end up taking a large share of an act’s income for years to come as they get bigger and bigger and negotiate new contracts and terms.

Last but not least, you should be aware of clauses regarding copyright reversion when it comes to the exploitation period. Some contracts may state that if the artist doesn’t request the copyright back after the contract/exploitation term, the label will retain it. Watch out for this detail.

Recording commitment defines the number of master recordings that the artist has to produce within a designated time period. The term can also be used to determine the play time and/or the number of songs that need to be made and featured on an EP or LP.

Sometimes, the information regarding a recording commitment can be covered in an overall section called ‘delivery requirements.’ Besides stipulating the number of recordings and the playtime required, the contract will also almost always include a requirement that the produced material be technically sufficient and commercially marketable. There might also be more requirements (and restrictions) regarding the cover artwork and the overall creative direction of the release.

Unlike the recording commitment and delivery requirements, ‘release commitment’ refers to the responsibility of the label, not the musician. In fact, release commitment refers to the label’s pledge to release a minimum product (a track, EP, or LP) within a specific time (X days, weeks, months) after the artist delivers the final recordings to them.

Let’s move on to a rather commercial side of the contract. Advances are an advance payment of the royalties that are assumed you will earn with your music in the future. As a specific amount of money (usually in cash), advances are given to the artist when they sign the record deal, marking the beginning of their initial period, or when they begin a subsequent project period, marking the start of an Option selected by the label.

There is quite a lot to be aware of when it comes to advances. First of all, they are never repayable but ‘recoupable,’ most often from your royalties. This means that the amount of money an artist gets from the label operates as a loan that is paid back through the master royalties the artist earns. The label will retain as much of your royalties until the balance earned reaches the balance given to the artist.

An advance may also not always be paid to you as an artist. Instead, it may be paid by the label on your behalf to third parties to cover the cost that the contract obligates you to pay. In such a case, the advance can be used to pay for items/services like studio fees, studio musicians' salaries, mixing and mastering fees paid to engineers, and more. Meanwhile, expenses that are not specified as ‘recoupable’ are covered by the label.

Generally, artists are free to use the advances paid directly to them however they want. You can use the money to fund your tour, invest in your marketing efforts, or get to work with wonderful musicians. It is all up to you! Just know that the initial sum you get is not what you really take home. Traditionally, managers and lawyers (and potentially other professionals, too) commission off these label payments.

Oftentimes, advances are paid in two payments. The first one is received when the contract deal is signed by both parties, and the second one is paid when the agreed work (in most cases, an album) is completed and successfully delivered to the record label.

In the previous section, we outlined that advances can generally be used to one’s liking. Recording budgets and marketing spending, however, are recoupable advances that cannot be spent freely, meaning they are dedicated to a particular purpose.

In addition to cash advances, labels sometimes establish these dedicated pools of resources to cover expenses for making and promoting artist’s music.

Artist royalties represent the cut of revenue earned from streams, downloads, physical records sales, etc. Subsequently, the revenue share determines the % of the revenue you keep vs. the % of revenue that the label retains.

The royalty rates may vary by territory (e.g., you get a higher royalty rate for domestic rates and lower for international sales) and, most importantly, by the type of label you choose. Major labels or their subsidiaries often work on a 70/30 or even 85/15 split, with the majority kept by the label. For indie labels, it is standard practice to offer a 40/60 or 50/50 split (label/artist).

You need to bear in mind that royalties will not reach your bank account before your entire balance is recouped. This means that only after you’ve paid back your advance and budgets from your royalties you will see the remaining profit hitting your bank account.

Speaking of recouping balance, you may also come across ‘net profits splits,’ which allow both parties, meaning the creator and the record company, to split costs evenly. Only after all costs are recouped does either side see the profit.

Another thing to consider is that the royalty rate you’re promised in the record deal will outline how much money your music needs to repay your advance. E.g. if you get an advance of $50,000 with a 15% royalty rate (common in traditional deals), your music will have to generate far more than $50,000 in total sales before you start seeing any profit.

While we just dived into the most important elements to consider in a record deal, we believe it’s crucial to name the following terms, phrases, and clauses that might seem a bit ambiguous and unclear and can make you feel confused. Most of these are common in deals with major record labels or their subsidiaries.

Such a clause is very common in 360 deals and specifies that the music company will take a cut of different artist revenue streams, including artist partnerships, sponsorships and endorsements, merch sales, touring, etc.

Mechanical royalties represent the money earned through the reproduction of copyrighted work in digital and physical form. These royalties are paid to composition owners, typically the songwriter(s) and publishing companies. Fundamentally, the rate of mechanical royalties is set forth by the state. In the USA, the statutory mechanical royalty rate is currently set at 12.4¢ per track or 2.39¢ for each minute of playing time.

This controlled composition clause/reduced mechanicals clause allows the label to pay a reduced mechanical royalty rate for songs written, co-written, or owned (and thus ‘controlled’) by the artist on whose album the songs appear. In most cases, the rate is reduced to 75% of the standard rate. Additionally, it may also allow the label to only pay mechanical royalties for a preset number of songs the artist makes per project (e.g., EP or LP)

For example, if you produce an album with 15 tracks but your deal only covers royalties for 10, you’ll only be paid for those 10 tracks, regardless of the total number produced.

This clause allows the artist to leave the label if the designated label person leaves the company.

This one is a particularly serious clause. It allows a record label to recoup advances (cover losses) from one album with other revenue sources and the next release(s). Particularly in the 360 deals, these other revenue streams may include publishing royalties, concert fees, profit made from touring, and merchandise sales.

Holdback periods ensure the label a designated time during which an artist cannot release other music. For example, you may agree with the music company not to release a non-LP song within six months of that LP’s public release.