“If a major record label signs you for a mill right now what’s first thing you doin?” NicoNiceWitIt, a producer who has worked with Polo G and Lil Mosey, among other artists, asked his followers on Twitter.
Great question, Nico.
Before we get into what an artist should do with the sum of money they receive from a label upon signing a record contract, let’s define an advance and explain how it works.
An advance is a “pre-payment of royalties.” Though it’s correct to think of the check (or “in-pocket” money) an artist receives when they sign a record contract as the advance, the term means much more. It’s shorthand for “advance against royalties,” meaning that the payment represents a portion of the artist’s future earnings. (Consider that when the artist receives that check, nothing has been sold yet.)
In a record deal, advances are “non-returnable”; the artist will never have to pay back the label. In fact, the record company defines almost every cost paid in connection with an artist as an advance, whether paid directly to that artist or a third party on their behalf.
If an advance is a pre-payment of royalties, and a royalty is a share of the proceeds from sales, then an advance is money paid to the artist before anything has been earned. If that sounds like a loan, it should, but it’s not quite the same as what a bank offers (partly because the record company agrees to eat their costs and doesn’t require the artist to provide collateral.)
With the understanding that an advance isn’t free money, nor is it a “signing bonus,” and the record label will never require you to pay them back literally, let’s break down how much “in pocket” money will actually (roughly) hit an artist’s bank account on a record contract with a $1 million advance.
Upon signing, a business manager (accountant) will typically take 2.5 percent (or $25,000), an entertainment attorney might charge 5 percent (or $50,000), and an artist manager(s) will take roughly 15 to 20 percent (or $150,000 to $200,000). On the high-end, using the $1 million advance as the starting point, an artist will spend $275,000 simply securing, negotiating, finalizing, and overseeing the record contract.
Next up is taxes. On the remaining $725,000, Uncle Sam will require a payment of $268,250, which is 37 percent of the artist’s adjusted gross income from the deal.
FINAL NET TOTAL: $456,750
So, now, let’s rewrite Nico’s initial question, but with the above in mind:
If a major record label signs you for $456,750, what’s [the] first thing you [should] do with that money?
No label is offering me a record contract, let alone one with a $1 million advance, but the first thing I would do with the money is to figure out how much I need to save to live comfortably for the next 12 to 24 months.
Working with my business manager, I would put together a budget to cover my essential monthly living expenses, including but not limited to shelter (rent or a mortgage payment), utilities, food, transportation, and insurance. After all, the entire point of the advance is to help an artist get on their feet to focus their time and attention on creating music.
The cost of living will fluctuate based on where you live, and it’s currently higher in 2022 with inflation at a 40-year high, but artists should approach the budget with the intention of living modestly. It could be several years, if ever, before an artist sees another dime from the record label. Recoupment, the process by which the record company collects on their “loan,” must occur before regular royalty payments begin to trickle in. Artists should seek to stretch their advance money for as long as possible.
With money earmarked for taxes and to cover monthly living expenses for up to two years, the first investment I would make is a home studio set up. The ability to record new songs without leaving the crib goes beyond convenience. Unlike a professional recording studio, a home studio is cost-controlled after the initial build. There is no hourly rate. Every dollar saved on recording costs is a dollar that an artist doesn’t have to recoup under their “recording budget.”
Editor’s Note: This is not legal advice and should not be interpreted as legal advice. The above scenario assumes a traditional record deal, with a royalty rate between 12 and 15 percent. I also did not account for taxes that an artist would be responsible for paying at the state level, as several states, such as Texas and Florida, do not require their residents to pay an income tax.