Throughout my career, and especially since the launch of this site, I’ve been asked many times for advice on royalties. This article provides a simple guideline for things you should know when dealing with royalties.
Royalties are still very common in other industries, such as writing and music, where the artists are paid on a percentage of the sales of their books or records (or ebooks and mp3s, but that gets into another sticky topic).
This is how it typically works. The artist is given a flat advance sum from their publisher while they work on the project. This money allows them to pay their bills and live while they work on the project. Once the work is published and begins to sell, depending on the terms of the contract, the artist earns a percentage of each sale. They will not start to receive royalty checks, though, until the accrued royalty amount surpasses the advance amount they were paid up front. This is often a point of confusion for artists, so I’ll clarify with an example.
Royalty Advance Example
(These numbers are all simulated, just to help understand the principle, and the math) An author signs a contract to write a novel. He is given an advance on royalties of $20,000, and a deadline of six months. The contract also stipulates that the author will receive a 25% royalty of net proceeds from the book (more on net vs. gross proceeds later). The author completes the book on time, everyone is happy with it, and it hits the bookshelves later in the year. Sales are going really well, but there is no royalty income for the author on his first royalty statement (usually issued quarterly).
Because the amount of royalties based on the 25% of the net profits has not gotten high enough to cover the $20,000 the author was paid up front. As soon as the royalties surpass the initial $20,000, the author will start to receive money every quarter as long as the book continues to sell.
Unless you sign a terrible contract, if your project sales never reach the amount of your advance, you DO NOT have to repay the difference to the publisher. The advance is a risk they are assuming in the belief that your project will see profits well above the initial advance amount. If for some reason it does not, they are out the money.
Net vs. Gross Receipts
Most royalties are based on net receipts. Net receipts are the amount a project makes after all of the costs have been taken into account. Net receipts means the amount of money the project has made after the printers, distributors, advertising costs, and a variety of other costs have been taken into account. So if your book retails for $19.99, don’t think that your royalty percentage will be a percentage of $19.99. It will be a percentage of a much lower dollar amount per unit sold. In comics, a distributor such as Diamond takes 60%-70% of the retail price of every book. Then take in the cost of printing and advertising. You can see how quickly the amount you make per sale can diminish.
Gross receipts are the amount the publisher takes in from the sales of a project, minus the percentage the distributor takes. A royalty made on gross receipts will be a much lower percentage, and quite frankly, very rarely occurs. Almost all royalties are based on net receipts.
Third Party Licensing Royalties
A really good contract will offer a royalty at a higher percentage if the work is licensed to a third party. This royalty can often be as high as 50%, and is really a great deal for the artist. If you find a company that offers this kind of deal, odds are they are a really great company to be working with.
Sometimes, especially when a large amount of art is involved, the artists will be part of a royalty pool. This means that a certain percentage royalty will be set aside for the artists. Then, when money starts coming in, the royalty will be divided up among the artists.
Royalty Pool Example
A card art project calls for 100 pieces of art, and a 10% royalty based on net is set up for the artists. You are contracted to do ten pieces for this project. Therefore, when the royalties start being paid off, you get 10% of the 10% pool, or 1% of the net receipts for the game.
You may be saying to yourself that that doesn’t sound like very much, and maybe it won’t be, but keep this in mind. When Peter Adkison, Richard Garfield, and Jesper Myrfors were looking for artists for their new game called Magic: The Gathering, they offered artists a $25 dollar advance on a 2.5% pool. Those artists wound up making $10,000 PER CARD! Yes, this is a once in a lifetime example, but it shows the possibility.
At that time quite a few companies used the royalty system, now hardly anyone in gaming does. Do you know why? Their excuse is that it’s too difficult to calculate. With today’s accounting software that’s just not true. As I stated earlier, a majority of publishing houses, record labels and movie studios use royalties. The real answer they don’t use them is laziness, or greed.
PACT would really like to see smaller companies that can’t pay much up front consider using the royalty model. It says to artists, “We don’t have much right now, but if this thing goes well, we’d like you to profit from it, too, for all of your hard work.”
Jim is the driving force behind PACT. As a freelance veteran of fifteen years, Jim heard countless tales of woe from his colleagues. Because of this he decided to create a website that would be a one stop informational resource for freelance illustrators, and provide them with a place that they could rate the companies that they have worked for. Along with his co-founders, the idea of the website was presented at the Illuxcon convention in 2012. The response was overwhelmingly positive, so they worked together to lay the groundwork for the website, and run the Indiegogo campaign that raised the seed money for the website. This website is the result of all of their hard work. With the support of the freelance community, it will help to lead freelance illustration out of the current rut it is stuck in.