I was reading an article recently about an indie film maker that stated they use a rate of return for investers at 110%, and if very risky 125%. After the return, the investment is considered paid back and payments stop. What have you found successful for investors?
Financing / Crowdfunding : Rate of return? by Bryce Gardner
Rate of return?
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I can't imagine an investor being satisfied with a 10% or 25% stop on return. If they invest (say) $100,000 on a $500,000 budget and the movie makes $10,000,000 they (essentially) lose out on a lot of money. But if the movie doesn't make it's budget back their investment is lost. So there is no real upside to invest under an agreement like that. I would offer a percentage after their 110%/125% payout.
what percentage after that do you think would be fair?
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This seems like the old stock versus bond debate. The limited return is basically a loan with a contingent but maximum interest; whereas often the financing is equity financing. Investors might prefer the guaranteed but limited return because - depending on the other terms which are not spelled out above - it makes them a creditor and they have recourse agianst the production company if it does not pay for any reason including not making money. On the other hand, an equity partner if they get shares has the legal right to dividends, but has no right to the return of their investment... it is capital. So if the company makes money but doesn't declare dividends, they may be out of luck or have to sue for their share of the profits BUT they do not get their investment back unless such an option is built into the stockholder rights. So... yeah some investors, especially those unfamiliar with film, might opt for the more secure guarantee...
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In a negotiation with investors what I think is fair may be irrelevant. What you think is fair may be irrelevant. What the investor thinks is fair is more likely to be relevant. Did the article you read address this issue?
No it didn't, but you bring up a valid point.
So this article you read is very limited in its information on investments. It only mentions one of many methods. But if one finds an investor (or group of investors) willing to take the risk with no "points" that can be an advantage for the filmmaker. Not so good for the investor. In my experience with investors they are less interested in helping a filmmaker than they are in making money on their investment. So an investment of (say) $200,000 than can ONLY return a max of $50,000 (125%) doesn't seem like a good risk to me. And I'm not an investor.