Band Incorporates As A Company And Raises Money, Rather Than Signing With A Label

from the smart-move dept

Thu, Nov 6th 2008 9:55am — Mike Masnick

Reader Mike Z. points us to an interesting experiment by the band Francis and the Lights. Rather than going out and signing a record label deal, where the record label basically gets near total control over the band and its works, the band has incorporated itself into a company and raised $100,000 from The Normative Music Company as an investment. As the folks at Normative note, this structure is much more like a startup going out and raising angel or venture capital. It also makes a lot more sense. The label structure often takes way too much control away from a band. A model more similar to the venture capital model has some very compelling aspects to it. What's unclear from the article, though, is how the investment is structured. Unlike a startup, it seems unlikely that the band will be acquired (or go public). I'm guessing there must be some sort of "dividend" structure, where the band is expected to pay out a percentage of earnings to the investor. Who knows if it will work for this particular band, but it definitely seems like a model worth watching. Hopefully we'll see some more bands test it out as well.

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Filed Under: business models, incorporate, investment, music

32 Comments

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COD (profile), 6 Nov 2008 @ 10:13am

So can I short bands that appear to be, uh, short on talent?
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moore850 (profile), 6 Nov 2008 @ 10:17am

Just take out a loan
Even better, just incorporate and take out a business loan in the name of the band company. That way, you pay back the minimum for such an investment and then, assuming the band is profitable, the rest is yours. You could crank out one-hit wonders with this structure and even at a minimum return if you can chart a single top 10 hit, you'd easily repay the loan and make 100% profit from then on out on royalties.
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- hegemon13, 6 Nov 2008 @ 11:40am
  
  Re: Just take out a loan
  A loan that hinges on the success of your music would be a pretty tough sell to any bank. If you don't already have stellar credit and substantial collateral, don't expect to get a loan as a startup band.
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- Paul, 9 Feb 2009 @ 5:29am
  
  Re: Just take out a loan
  What will stop most bands from doing this is that financial institutions typically want 2 or more years of solid financial records before making a loan.
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alex, 6 Nov 2008 @ 11:03am

i think its a great idea, with one important thing caveat though. the label traditionally managed so much of the band and took care of those big important decisions. if a band raises money and goes off on its own, great, but they'd better have a good manager
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Killer_Tofu (profile), 6 Nov 2008 @ 11:06am

Big Labels Suck
This is why no laws should be passed to protect the old business models of the large recording industry. By doing so, they are trying to prevent this sort of competition, if you will.
It will prevent newer and better models from emerging.
That is overall a net loss all around for everybody except the bloated incumbents.
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some old guy, 6 Nov 2008 @ 11:15am

Whats the urgency to go public?
What is with the common perception that all companies need to go public to be successful?

Mike states this as an assumption that they will eventually either go public or be bought out.. but I don't see any reason why this must be.

You would think, especially in the artistic scenarios, that the band members would like very much to remain in control of the company so a third party (board) can't order them to say... replace their drummer with one cheaper.
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- rockerest, 6 Nov 2008 @ 11:26am
  
  Re: Whats the urgency to go public?
  He specifically said that it's UNLIKELY that the band will be acquired or go public. He was just inquiring as to how the investment will work.
  
  Sheesh.
  
  Literacy FTW.
  
  -rockerest
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Anonymous Coward, 6 Nov 2008 @ 11:28am

Anything about it's supposed to actually generate revenue?
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Emerson, 6 Nov 2008 @ 11:34am

Didn't David Bowie do this already?
Didn't David Bowie sell Bowie Bonds, that guaranteed him $55 million up front from the sale of the bonds, and for 10 years he forfeited the royalties from his pre-1990 music to the bondholders? A few other bands followed, and such bonds are now known as Pullman bonds.
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CVPunk, 6 Nov 2008 @ 11:37am

umm....
I'm failing to see what is good about this model?
If it is simply about keeping control, then raise money from doing shows (if you are any good) and put your album out DIY style.
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Pragmatist, 6 Nov 2008 @ 11:51am

re: umm....
This model happens to be a refreshing change from the ordinary structure of things.

In the typical record deal a band will sign for an initial term, usually for a single album, with label options to renew the contract for additional albums at its discretion. Via the record deal the label will front all the money necessary to record, market and distribute the album(s). In return for this, which the band will ultimately have to pay back before realizing any profit, the band assigns all their rights to the recordings and the proceeds of the album sales. Bands are then entitled to a royalty based upon adjusted sales figures (factoring in accounting reserves and other reserves for returns and promotional giveaways and deducting expenses).

Here the system (absent loan provisions to the contrary) allows the band to retain rights to their recordings, retain rights to their income stream and full control of their creative decisions. While they could theoretically raise money from doing shows and then self finance this framework would speed up the process of penetrating the market. It could take an exceedingly long time to tour enough to draw sufficiently large crowds to bank capital for an album recording and release.
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- CVPunk, 6 Nov 2008 @ 1:36pm
  
  Re: re: umm....
  Ok, I get what you are saying. It does sound interesting, but it's not impossible to have complete control when signed to a major. The punk band Anti-Flag signed to RCA for a 2 record deal with an option for a 3rd and they control the content and retained the rights to the music when they leave the label.
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Guh3 Sahlgren, 6 Nov 2008 @ 11:55am

How is this different?
I'm failing to see how this is any different than any other indie-band that's ever been successful. You incorporate, get a line of credit & bank loans to pay for equipment, transportation and CDs (if that's even still necessary). If you're lucky enough to get someone to loan you money you do that too. It's a business & you're in it for the long haul. In the pop & rock world, major labels, and by extension the bands that sign to them, are in it for a quick buck and very rarely have any staying power. The ones that do take the money and run and go indie.
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John Doe, 6 Nov 2008 @ 11:58am

They are trading the devil they know for the one they don't know. They will now answer to shareholders rather than a record label. I applaud them for trying something new, but this model does not put them entirely in control of their own destiny.
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- Killer_Tofu (profile), 6 Nov 2008 @ 1:17pm
  
  Re:
  Now I am not a super business man, but my understanding is that not all investors are shareholders. Technically, doesn't somebody giving out a loan make them an investor? They are giving you money and expecting a return. However, the shareholders will want to be able to direct your company, which is in almost every case I have seen, Bad.
  So this model very well does put them in control, depending on the investors and type of agreed upon investment.
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  - Mike (profile), 6 Nov 2008 @ 6:07pm
    
    Re: Re:
    Now I am not a super business man, but my understanding is that not all investors are shareholders. Technically, doesn't somebody giving out a loan make them an investor? They are giving you money and expecting a return.
    
    This is incorrect. There are different ways that you can give money to a company: one is a loan (debt) and the other is an investment (equity). Providing a loan does not make you an investor.
    
    A loan has a set term for repayment, but provides you no ownership stake. You provide a loan to get a steady stream of interest revenue.
    
    An investment gives you equity, or a piece of the company. It gives you ownership, and thus some amount of say in the direction of the company. In that case, you're usually betting on the upside: that your stake will become worth a lot more than you paid for it.
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    - Killer_Tofu (profile), 7 Nov 2008 @ 5:50am
      
      Re: Re: Re:
      Thank you for the clarification Mike.
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Mojo_Death, 6 Nov 2008 @ 12:08pm

Capitalism Works!!!
If you leave free markets alone to figure it out for themselves, they always will. It's not always nice, or pretty, but capitalism works.
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- mattyk, 17 Nov 2008 @ 9:11pm
  
  Re: Capitalism Works!!!
  Oh yeah. It works great, as long as you have a government willing to throw billions of dollars at the banks to prop up a failed system. The record companies are just like the banks, extorting more and more money out of their clients to prop up what is nothing more than a money machine for a few execs and their big shareholders.
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Anonymous Coward, 6 Nov 2008 @ 12:12pm

This loosely reminds me of this TV series on BBC America- Dragons Den.

http://www.youtube.com/watch?v=BFTJ0i0lT8s

Hmm.
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Anon Cow, 6 Nov 2008 @ 12:20pm

Now, allow people to make micro-investments in these up-and-coming band corporation and you might have something. Get 1,000 fans to donate $100 and you've got more than enough $$$ to record, master, and release an independent album without stepping foot into a major label office.
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Anonymous Coward, 6 Nov 2008 @ 12:27pm

The Bowie bonds (not equity stock) were successful because Bowie's compositions were already a proven revenue stream, and would always remain that way because of (gasp!) copyright law.
This model - I don't see how it ensures any profit.
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- Chronno S. Trigger, 6 Nov 2008 @ 1:50pm
  
  Re:
  I don't see how having a copyright or even signing with a label ensures any profit ether. You still have to have talent. Same with any business. You must have the money, business plan, and talent enough to use them.
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Anon2, 6 Nov 2008 @ 1:00pm

Old School
This is all as old-school as it gets -- absolutely nothing new here in the least. Indeed, if more artists follow suit, it will mark a return to a business model extremely common in the 1940s and 1950s, before the emergence of the mammoth label system. Indeed, although the model faded in favor of the labels as financiers, it's never completely disappeared, and there have always been bands that attracted investment capital by selling equity stakes, or some other sort of interest in their future earnings. In many cases, rather than finding one single angel, artists and bands would instead have to cobble together investor groups, each holding some set percentage stake (i.e., some number of shares).

Nor is the idea of incorporating a band anything remarkable -- virtually every band in existence will sooner or later set up some sort of legal entity, whether it be an S-corp, C-Corp, LLC or whatever. It's a necessity for a host of reasons.
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Anonymous Coward, 6 Nov 2008 @ 1:59pm

True - but 20 plus comments down, no one has explained how this plan will make a profit for the band.
Not all copyrights will make money, but the Bowie bonds would have been worthless without the profit potential available because of copyright law.
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- Mike (profile), 6 Nov 2008 @ 6:09pm
  
  Re:
  True - but 20 plus comments down, no one has explained how this plan will make a profit for the band.
  
  It's not "this plan" that makes money for the band. It's the business model that the band eventually puts in place. But "this plan" gives them a different method to financing their efforts.
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Anonymous Coward, 7 Nov 2008 @ 8:14am

Mike - there's no point of investing money unless you expect a profit on the return.
Why is "give us money, we're a rock bank and you like us" so much better than, "we made a record, please buy it if you like it?"
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- Killer_Tofu (profile), 7 Nov 2008 @ 1:22pm
  
  Re:
  The "give us money, you like us" used as a method of once we get X amount of money, we will create and album, is a sustainable business model. It will not work for all. But it at least goes in the correct direction of charging for something scarce, the band's time to create the album.
  
  However, "we made a record" in some cases tries to simply charge for the music, which, once made, is infinitely available. Some artists, such as Trent Reznor add good incentives to buying those records. And as one could see from his sales, it works quite nicely. However, the music itself, once made is infinitely available, and trying to charge for anything that is infinitely available just is not sustainable. Basic economics drives the price to zero. That is why we are not charged to breathe. Air is infinitely available. If the MAFIAA has their way, eventually, you may just be charged to breathe after all.
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Jamison Antoine, 7 Nov 2008 @ 10:02am

Not Impressed
I am not sure how this would be a plausible strategy in this current economic environment especially if the band/artist does not have any track record to leverage.

The band is issuing a security and protecting itself from ever having to pay any of the money back. The investors would not be able to go after the band members personally and all they could claim is the bands assets if there are any left after other creditors have been paid.

You may as well call it what it is a gift to your friend, son, brother, sister, etc.
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Anonymous Coward, 7 Nov 2008 @ 2:26pm

Tofu - that doesn't make any sense. If no one is going to pay for an album, then why invest in a band to make one? Especially one with no previous success?
What is this band's plan to make a profit?
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Snake, 24 Nov 2008 @ 3:18pm

Corporate Music
As a musician from the 60's I can tell you that Chicago did the same thing and they are still performing. The band members of Chicago were either employees or shareholders or both. When an employee left, he was replaced and/or bought out. The band continued, rahter successfully, for 40 years.
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