State of the Industry: Contract Decoding, Part Two
In this second of three installments, Milt Toby explores perhaps the most popular of subjects: getting paid for your work.
As an accomplished author and attorney, Toby is better equipped than most to be your guide into the publishing world. In our January edition, Toby gave us a glimpse at contract decoding and how to determine where your rights end and the publisher’s begin.
So put the cushions back on the couch, leave the kids’ piggybank alone, and hold off on calling that bookie—at least until you’ve heard what Toby has to say. In this installment, he will show you how to understand your contractual payment rights. We’re not guaranteeing you profit (that’s between you, the publisher, and your audience), but we are guaranteeing that no kneecaps are assaulted due to a failure in communication.
Contract Decoding (Part 2 of 3)
By Milt Toby
As mentioned in the first installment of “Contract Decoding”, a publishing contract can often be riddled with mind-numbing legal jargon. The author must understand, among other things, the rights being sold and warranties/indemnifications present within the contract—difficult channels to navigate, at best.
The publishing contract also establishes how, and how much, the author will be paid.
Common payment schemes include:
Flat fee;
Advance with royalties deferred;
No advance, with royalties starting with the first sale.
A flat fee is just what the name suggests. The publisher pays the author an agreed upon amount, usually divided into two or more installments triggered by specific events such as signing the contract, delivering the manuscript, and final approval by the editor. A flat-fee payment before any book sales might sound a lot like an advance—both are upfront money—but there is an important difference between the two that authors should understand.
After the flat fee is paid, the publisher has no ongoing financial obligation to the author in the form of royalties from book sales. An advantage to a flat fee contract is guaranteed income for an author early in the publishing process; a disadvantage is that the author has no financial interest in how well the book sells. Over the long term, especially if the book turns out to be a popular one, an author might earn more from royalties than from a flat fee.
An advance against royalties, especially a large one, is the Holy Grail for authors—money when the contract is signed, plus royalties based on sales. Only a small percentage of publishers offer advances these days, however, and authors lucky enough to land one need to understand how the numbers work.
Unlike a flat fee, which is not dependent on sales, an advance is money paid to an author by the publisher in anticipation of future book sales. A typical structure for advance payments is one-third of the total amount when the contract is signed, one-third when the manuscript is delivered by the author, and one-third when the final version of the manuscript is approved by the publisher. For authors of fiction, who generally sell their books based on a completed manuscript rather than on a proposal, the first two installments in the example above could occur at the same time.
One aspect of an advance that sometimes confuses authors is the notion that an advance is free money. In fact, royalty payments to the author will not begin until the book has “earned out.” This is a term of art which means that the publisher recoups the advance already paid by keeping all royalties until the full amount of the advance is recovered. Only then, and only if the books earns out, will royalty payments to the author begin.
The majority of books do not earn back their advances, however, unless the author is among the Stephen Kings and Dan Browns of the publishing world. For that reason, it is prudent for many authors to consider the advance the only money they will earn from their books.
The third payment scheme, and the most common one for fiction authors, is a publishing deal without any advance. The downside is obvious, no money up front. On the other hand, the author earns royalties starting with the first book sale since there is no advance for the publisher to recover. Given a choice, most authors probably would opt for an advance. Realistically, though, a choice between an advance against royalties or no advance will not be an option in most situations.
Running the Numbers
Royalty payments will be listed as percentages in a publishing contract. A typical (and imaginary) royalty schedule for a hardcover novel might look something like this:
10% of cover price/net price/net proceeds for first 5,000 copies sold
12.5% of cover/price/net price/net proceeds for next 5,000 copies sold
15% of cover price/net price/net proceeds for subsequent copies sold
For this to make sense, some definitions are in order:
Cover price: Self-explanatory, the price listed on the cover of the book (and the price most readers never actually pay)
Net price/net proceeds: The cover price of the book, minus the discount given by the publisher to book retailers. This method recognizes that book publishers typically are wholesalers of their books. A publisher’s net price/proceeds should not include any deductions for overhead expenses.
The distinction between cover price and net price is important. The terms should be defined and the contract should be clear about which number is being used as the basis for the royalty calculations. The difference between royalties based on cover price and those based on net price can be substantial.
For example, an author’s 10-per-cent royalty for a book based on a cover price of $25.00 is $2.50 for each copy sold.
If, on the other hand, the same 10-per-cent royalty is based on net price (the cover price of $25.00 minus the publisher’s discount given to book retailers, usually between 40 per cent and 50 per cent), the author’s royalty drops by as much as one-half, to around $1.25. A basic understanding of the mechanics of royalty payments helps an author avoid an unpleasant surprise when the first royalty check arrives.
A word about ebooks is appropriate here, because there is substantial disagreement about how to calculate the appropriate royalty rate for those paperless editions. Authors argue that the royalty rate for an ebook should be higher than for a print book because the publisher has very little overhead compared to printing, storing, and shipping print versions of the same book. The Authors Guild is pushing for at least a 50%-50% split on ebook royalties, characterizing the author-publisher relationship as a joint venture, but publishers are resisting. This is an example of how the competing interests of authors and publishers come into play in a publishing contract.
Finally, authors should consider how often the publisher is going to write a royalty check. It might take longer to get a check than expected. Many publishers calculate royalty payouts every six months, on December 31 and June 30, for example. The accounting period sometimes is unreasonably long, however, with publishers asking for accounting on an annual basis. Six-month accounting does not mean that the publisher cuts a check at the end of each accounting period, however. Contracts generally allow publishers an additional period of time—30 days at a minimum, sometimes longer—before they have to actually pay royalties to authors. Lengthy accounting periods, along with additional time to actually pay authors the royalties due, amount to interest-free loans from authors to publishers.
Lessons Learned
Authors should try and negotiate as short an accounting period as possible.
Publishers also frequently hold back a portion of the royalties earned by authors, called a “reserve,” to account for returns of books from retailers. The rationale is that a publisher might pay royalties on sales to retailers on books that later are returned for refunds. Authors should try and negotiate either no reserve or a reasonable limit on the length of time reserve funds can be held.
Publishers usually give authors a few free copies of the book (always ask for more free copies!) and the opportunity to buy additional copies of the book at a reduced price. Although authors generally do not earn royalties on these discounted purchases, authors can generate profitable full-price resales at signings, book fairs, and other events, unless the contract seeks to prohibit such retail sales by the author. Resale restrictions do not show up in publishing contracts often, and publishers often delete them if asked, but authors should look for these clauses if they plan to resell books themselves.
In our next edition, Toby will guide you through understanding “warranties and indemnifications”—what they are, and what rights you have regarding them
Milt Toby is an attorney and award-winning author of nonfiction. He joined the Board of Directors of the American Society of Journalists and Authors in July, after several years as Chair of the ASJA Contracts & Conflicts Committee. The information in this article is presented for educational purposes only and is neither legal advice nor a solicitation for clients. For more information about Milt’s books, visit his website at www.miltonctoby.com.