Sunday, February 7, 2010

The Basics of Film Financing

It's been a few years since I have been actively involved in film financing. I left LA in 1995 and have only been back since for weddings and funerals. However, recently I've been seeing some term sheets for films again and it has reminded me that the basic structure of a speculative film financing is quite different than what you see in a VC or PE style investment in an emerging growth company.

Typically, the first thing you would do for an independent film investment vehicle is set up an LLC for each film. The angel (production development) investors would then put in the initial capital. The interesting quirk is that these angel investors are typically cashed out upon first round/production financing. This is a significant difference from a technology/emerging growth company, where the angels or seed investors are expected to stick around for the long haul -- no one is taking any money off the table in an emerging growth deal.

In film financing, the angel round/development financing will range from $150k to $500k, with the production round ranging from as little as $1.5mm all the way up to $10mm or more.

From time to time you will see a combo debt/equity investment in the development round, but this is much less common than in emerging growth. Also, unlike emerging growth where the bridge debt will convert into the next equity round, in film financing you will almost always cash out the debt and then give the debt investor the right to participate in production finance round -- the right but not the requirement to roll over the investment.

Another interesting difference is that development costs are built into the overall budget that is financed with the angel financing, so these development costs are almost always recouped when the actual first round production financing is obtained.

As you can see, production development financing for a film concept, although superficially using similar terminology to an emerging growth company (ex. angel investment, first round financing), is really quire different. If you are not familiar with it and are thinking about investing, you should definitely consult with someone who is -- otherwise your assumptions may lead you astray.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.