When you sign a contract with a record label, you give them permission to exploit your music in return for royalty payments. Although a record deal may seem like the Holy Grail, it’s important to realize when and how you’ll get paid by the record label.
Record label contracts come in all shapes and sizes, but they all have similar key features and follow a similar structure.
In a record label contract, you’re getting paid directly by the label; not from Spotify, iTunes, YouTube, etc. This would be different if you were an independent artist.
There are three main ways you get paid in a record deal: royalties, physical sales and the advance.
In this article, we will look at how you get paid through each medium and the typical amount of time it takes to see your money.
Royalties – As you probably already know, artists receive royalties based on record sales, streams, Spotify playlisting, etc. Payment is typically made once per quarter (every three months). Almost all major labels do it this way. This accounting is usually done in March, June, September and December.
In addition, labels will typically send you royalty statements twice per year. These statements show a detailed report of earnings based on things like geography, track and other demographics.
In a major label contract, the artist usually earns between 14% and 18% royalties.
However, before you see any of this money, you’ll have to recoup the advance plus any additional deductions, which will reduce the real royalty rate.
Advance – An advance is a sum of money you receive upfront from the record label in order to fund your record. Advances are given immediately at the beginning of your contract and at the time of extensions.
The advance covers costs such as recording studio expenses, music marketing/entertainment marketing, Spotify campaigns, music publicist, session musicians, music PR agencies, Spotify playlisting, music promotion and reasonable cost of living expenses (rent, food, etc.). Advances can range from $50,000 to $250,000+. Any money that isn’t used usually goes in the artist’s pocket.
The key thing to know here is that this money is meant to be recouped by the record label. This means that all of the royalties you make from your music goes to paying off the advance–similar to a debt. So if you get to pocket some of the advance, it’s not really yours until the advance gets paid off by your royalties–so don’t blow it all at the club or else you’ll have nothing to live on with no album!
Once the advance is paid off, you receive a royalty split with the label. The rate depends on your negotiation. In the end, you'll probably have to split your advance with a few people including your manager, band members, music publicist, lawyer and of course the taxman. So even a generous advance can be skimmed pretty quickly.
Physical Sales – This category includes CD, vinyl, merchandise, etc. Again, all of these sales go towards the advance until the amount is paid off. Once the advance is paid, you’ll typically receive payment for these items every six or 12 months depending on your contract terms.
Those are the three ways you’ll see money from a recording contract. As you can see, it can take months before you see any profit so it’s crucial to be conservative with your money. Wait until the advance is paid off and you’re climbing the charts until you pop bottles and celebrate!
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