Contracts for Creative Entrepreneurs-Part 3: Payment
Today marks the final instalment of the Contracts for Creative Entrepreneurs series, where we've covered Deliverables, Exclusivity – and now, Payment. Yes, it's likely that you love what you do - and would do it even if you weren't getting paid for it. However, if you're considering making the move to sign a contract, it's important to know how the payment will work. Here are some elements to look for:
1) Flat fee
Sounds basic, right? Depending on the agreement and the type of product or service you're providing, a flat fee can mean that you're selling the copyright to your creation - or not. If you're an artist and are commissioned to create an original piece of work for a restaurant to hang on its walls, it's a relatively straightforward transaction: artwork for money. But maybe you're a singer and a brand has approached you to use one of your songs in an ad campaign. Your flat fee may mean that they get to use the song as much as they want - with no further payment to you. No matter how many countries that commercial airs in, or for how many years, there is no other money coming your way from that contract.
Is your contract a single payment arrangement? Double check your notes from Deliverables and Exclusivity to figure out how this combination of factors will effect you and the earning potential of the work you’re creating.
In most royalty situations, you'll receive two forms of payment. An advance payment, and then additional amounts over the course of the contract or life of your work. As an example: In traditional publishing, writers' book deals are like this. The publishing house will pay an amount to the author up front and then for each book sold, the author earns an additional percentage of the book sale price. These future royalty percentages are usually small, so for them to add up, the book needs to sell quite well. When you hear that (or see a 1.6% royalty amount in a contract) the urge will be to try and get as big of a lump sum advance as possible. But be careful - a larger advance payment may mean that you need to wait longer for any future checks to come your way - you'll only start receiving those royalties once you've paid back the whole advance amount.
Make sure that you do the math to figure out how long it will take you to pay back the advance. If forecasted sales are so low that it will take you 2 years to start seeing any additional income from the project, are you able to stretch that advance and make it last? Ask if the team you’re negotiating with will discuss their projections with you (most likely, yes) and then figure out what your revenue flow will look like under ‘poor’ ‘average’ and ‘fantastic’ sales projections. From there, you’ll be better able to make a decision whether you want to ask for a larger advance, or a bumped up royalty.
3) Pay for performance
When your creation isn't as tangible as, say, a book, or a piece of art, your payment may not be based on sales of product but on another performance metric. An example of this is 'pay-per-click' in advertising: for every visitor that clicks on an ad your blog hosts, you receive payment. No clicks? No money. Some consulting contracts may provide payment as a percentage of the total savings or sales secured by the consultant. Are you a conversion specialist? SEO consultant? Content marketing strategist? This type of payment structure may be crossing your desk.
What to watch out for: Make sure that your contract specifies exactly what level of performance you need to hit in order to earn payment - there can't be any confusion on this. There also can’t be any confusion about what you’re being measured on, and how you’re directly able to influence it. If you provide a strategy, but the real magic happens in the client’s implementation…signing up for performance based pay could bite you in the butt when they drop the ball internally.
If you're new to your market a pay for performance contract may be a good way to get your foot in the door, build a portfolio of clients and earn referrals. They're lower-risk for the client - they'll pay only for the 'value' you've brought, and because it's a higher risk for you, you may be inspired to hustle a bit more to bring in the results.
4) Payment terms
By now, you've established what you'll be getting paid for, and how. But you'll need to take the 'how' question a bit further. The two key elements to getting the money from the client’s account and into your pocket are:
Timing - When is the payment due to you? On signature of the contract? At the end of the contract? In installments? Traditional '30 day' payment terms - where payment is issued after a 30 day delay? In your contract, look for how you can link payment with your delivery of the product or service. For example, if you’re a graphic designer, ensure that the contract specifies that your final payment for 100% of the project price is due BEFORE you send the final files to the client.
Method – Method of payment has a ‘before’ and an ‘after’ to it. Before payment: Do you need to invoice? When? How? What’s the billing period? How detailed do your accounts of billed hours need to be? After – or – the actual payment method: Will you get a check? Direct deposit? Paypal? Which currency? Be careful if accepting checks for a currency other than your local one - some banks (like mine!) will put a 6 week hold on foreign checks. Can you really wait 6 weeks for that money to be available to you?
It may seem a bit extreme to list out the entire process of invoicing and payment in a contract, but doing so can help you avoid major headaches down the line. In the best cases, you’ll sign this contract, pop it into the client file, and then not need to look at it ever again. But in the worst cases, this signed agreement will be your lifesaver when it comes to protecting your work and collecting your payments.
Bonus: Don't forget!
Payment in kind.
An alternative to 'traditional' payment (product/service in exchange for money) is a payment in kind or bartering. A photographer could take photos for the local coffee shop in exchange for a year's worth of lattés. Or a photographer could take portrait photos for a copywriter, who in exchange writes the text on the photographer's website. This can be a great way to build relationships and a portfolio - which can then help earn you clients that will pay traditionally. It's true, you can't pay the rent in coffee, or shoes, or jewelry - but if you're just starting out, don't forget to consider this option when it comes to your contracts and business deals. You can still create a short, simple contract to cover the delivery, exclusivity and payment elements – and you can even still send an invoice, indicating the full value of your product/service, and then the discounted rate or ‘payment in kind’ at the bottom. Because even if no cash is changing hands, don’t be shy to declare that value.
Note: Although I work with contracts regularly, I am not a legal professional and my advice is not intended to take the place of that of a lawyer. I recommend that you seek professional legal advice regarding any contract that you are considering.