Payout Schedules
While the size of the advance is the criterion by which most authors measure the commercial value of their books, the size and timing of the installments in which the advance is paid are just as significant, and sometimes more so. Because the "payout schedule" directly affects the cash flow of publishers and authors, it is often a bone of bitter contention in negotiations, and many a player has walked away from an otherwise good deal because a disadvantageous payout schedule nullified advantages gained in the negotiation.
With few exceptions, advances are paid in installments. Part of the total money is payable upon signing the contract, the balance payable on acceptance of partial, complete, or revised manuscript; on certain calendar dates; on publication; and even after publication. Although the payout formula may be fairly simple when the advance is small, publishers and agents devote a great deal of attention to it when the stakes get high, The reason, of course, is the cost of money.
Although interest rates and inflation have (as of this writing in 2008, at any rate), remained stably below 10% in the last decade, even 5 percent per annum is worth fighting over and may indeed make a significant difference to the balance sheets of both publishers and authors.
Let's take a closer look at payout schedules installment by installment and sketch some ways authors may improve their position when the haggling begins.
* Payment due on signing of the contract. All contracts large and small require a consideration to be paid on signing, even if it be no more than one dollar, in order to bind the agreement. If the total advance is small enough, it may be payable in full upon signing. Most publishers today, however, have policies prohibiting payment in full on signing, and editors are ordered to defer some part of the advance when they conduct negotiations with authors or agents. Even if your book is a flawless gem requiring not a jot of revision, an editor may contrive to pay a second installment of your advance "upon acceptance of revisions" in order to satisfy company policy. Then, a week or two after requesting the signature installment, the editor will put through the acceptance installment as well.
If the contract is for an unwritten book, the advance will be divided at least into an on-signing payment and an acceptance one to give the author some money to live on while writing, and to create an incentive for him or her to deliver the work. The publisher may try to divide the advance even further, into installments payable on delivery of a partial manuscript or first draft.
You will have to do some solid reckoning before accepting too small an installment on signing, otherwise you'll run out of money before you turn in material qualifying you for the next installment. First you must subtract your agent's commission if any, then calculate the amount of time that will pass until you are entitled to the next payment. You then have to figure whether your living costs (including anticipated lump sum payments like school tuition, income taxes, or insurance premiums) during that period will be covered by what you collect when you sign your contract. A $50,000 advance may seem attractive to you, but if your publisher wants to pay you $10,000 on signing and it takes you six months to write the book, and your monthly living expense are $3,000, you're going to be up the creek halfway through the writing of the book. So you must bargain hard for a down payment that will sustain you until you've turned your manuscript in.
* Payment due on delivery of partial manuscript or first draft. These installments are generically known in the book trade as "satisfactory progress" payments. To help bridge the gap between the on-signing and the acceptance checks, and to encourage or compel progress, publishers frequently negotiate installments payable when the author turns in part of the book. A typical deal might be structured: one third on signing the contract, one third on delivery of half the manuscript, and one third on delivery and acceptance of the complete manuscript.
Of the many ploys cooked up by publishers to stretch out their money, "satisfactory progress" is the least effective, and if it weren't so dangerous it would be just plain silly. At the very least, "satisfactory progress" is satisfactory neither to authors nor publishers, and the only thing it does for progress is halt it.
In a "satisfactory progress" situation, an author faces a number of choices, all of them terrible. He can turn in a rough draft, which is usually an embarrassing mess that will send most editors into respiratory arrest, or at least provoke them to request revisions that the author would ordinarily make on his own when tackling the final draft. Or he can stop work in the middle of the book, polish and retype what he's done so far, and turn a partial manuscript in. Either way, he will have to suspend work on his book until he has received some feedback from his editor.
Even if his editor offers no feedback whatever, it may take weeks or longer to get that editorial reaction, and such delays are inevitably harmful to creativity and cash flow. If the editor does have criticisms, the author may be required to rework what he's turned in in order to get his hands on that money. To avoid all that hassle, therefore, an author may choose to forgo his "satisfactory progress" payment and forge ahead with the rest of the book, which defeats the purpose of such interim payments. Most authors do not polish chapters after drafting them, but prefer to finish a rough draft of the entire book and polish it in the final draft. Thus the time between the completion of a first draft and a final draft, or delivery of half the manuscript and all of it, may be so brief that the machinery for putting through the "satisfactory progress" installment will scarcely have begun turning when it will be time to put through the final acceptance payment. Furthermore, many editors feel it's silly to read a partial manuscript or first draft when the final product will be turned in a few weeks or a month later.
In short, "satisfactory progress" payments reflect little understanding of how authors work and pose a genuine threat to both the quality of a book and the timeliness of its delivery. Ultimately, this ends up hurting the publisher as badly as it hurts the author.
* Payment due on acceptance of the manuscript. Whenever possible, the balance of the advance on a commissioned book should be payable no later than acceptance. A number of contracts stipulate that a manuscript is deemed acceptable unless the publisher notifies the author to the contrary within a period of time, thirty days, sixty days, or thereabouts. This is a very desirable feature and one worth fighting for if it does not appear in the boilerplate of your contract.
In most contracts the definition of "acceptability" embraces revisions. If serious revisions are required by a publisher, the acceptance segment of the advance may be delayed until satisfactory revisions are turned in. If the revisions are minor, however, the publisher may often be prevailed upon to put through the acceptance money and take it on faith that the author will turn in acceptable revisions. There is an in-between state where revisions are necessary but the author cannot afford to do them without some sort of financial relief. In such cases the publisher may be persuaded to release some of the acceptance money to carry the author during the revision period.
I've expressed myself many times about the prevailing requirement in publishing contracts that an author must repay the on-signing installment of his advance if his manuscript is rejected. But in case you haven't read what I've said - well, I think it stinks. The on-signing advance should be regarded as a forfeitable investment, not a refundable loan. Needless to say, hard-headed (or hard-hearted) publishers see things quite differently.
* Payments due on publication. The purpose of publication installments is to enable publishers to start recouping what they've paid the author as soon as possible after disbursing his or her advance. Publication payments used to be the norm in American publishing. Then the rise of strong agents in the 1960s drove publication payments out of favor. But when money started to get expensive again in the 1970s (with double-digit inflation and interest rates), publishers pushed the agents back, and it is now common for publication installments to be paid. In some foreign countries such as England, the publication installment is still an article of faith.
The most common mistake authors make when agreeing to publication payments in a negotiation is failing to fix a time limit on them. Unacceptable language is, "$5,000 payable upon publication of the Work." Acceptable: "$5,000 payable upon publication of the Work or twelve months after acceptance, whichever date is sooner." The reason should become obvious if you think it through. Few contracts require publication of a book in less than twelve months after its acceptance, and many allow for publication in eighteen or even twenty-four months. Tacked on to these times are grace periods giving publishers an additional six months or more beyond the deadline to publish the work upon notification by the author that the deadline has passed. A publication payment may therefore not be due for as much as three years after a book has been accepted.
What is worse, publication of a book may be canceled entirely for any of a number of reasons: staff changes, new policies, or events or trends that date that book. That means that the publication portion of the advance will not be payable at all, at least not according to the publisher's interpretation of the contract. I don't know if the point has been tested in court, but it can certainly be argued that if you sell a book to a publisher for $25,000, and the publisher cancels publication, you still sold the book for $25,000 even if some of that sum was yet to have been paid, for the publisher's convenience, on publication. Therefore, whenever you negotiate a publication advance, you should always stipulate that the installment will be due on publication or X months after acceptance, whichever date comes first. The X is negotiable, but should be no longer than the outside date by which the publisher is required to publish your book.
* Postpublication payments. Publishers have devised a fascinating array of gimmicks to postpone the day of reckoning to authors. Among these is the postpublication advance. Such installments may be payable on a specific date - X months after publication, say - or, in the case of a hardcover-softcover deal, one installment may be payable when the hardcover edition is published, another when the paperback edition is brought out. There are other creative variations on this theme, but because a book begins earning royalties from the date it's shipped, all postpublication advances amount to the same thing: paying authors with their own money.
Authors may want to try to negotiate payout schedules advantageous to their income tax status. An author who has already made a lot of money in a year may not want to receive a large on-signing payment that same year. A deal can be structured, therefore, so that only a token amount is paid on signing the contract and the balance of the on-signing advance is paid early in January of the following year. Not surprisingly, publishers like such setups, since they enable them to legitimately keep authors' money for several months. Literary agents, however, are not always thrilled to have their commissions deferred just because a client is enjoying a good year, so I don't feel your agent is out of line to request his commission on the full on-signing advance now, and to take no commission when the rest of your money comes in January.
If you do want to structure installments in a way that you feel is advantageous to you tax-wise, and your publisher is agreeable to the arrangement, the time to do it is when your contract is negotiated. If a contract is already in force and you ask your publisher to defer until next January a payment that is due this October because you don't want more money this year, the Internal Revenue Service may disallow it if you are audited and your publishing contract examined. The same holds true of requests to agents to hold your money until the start of the next year.
The law makes it quite clear that money received by a fiduciary - a literary agent, for example - is construed to have been received by the author. This is not to say that publishers and agents do not hold money for authors in such circumstances, but getting away with it doesn't alter the statutes concerning "constructive receipt," and you may be liable for an adjustment in tax for that year plus interest and penalties.
Even if you are nothing more than a working-stiff type writer, it's still a good idea to get as much money up front as you can. A smart agent and a smart accountant will help you to structure your cash flow so that your hide is relatively intact every April 15th. Don't let publishers earn interest on your money. Remember, the sooner you get your hands on it, the sooner you can start blowing it on stupid investments.
This article was originally written for Locus, The Newspaper of the Science Fiction Field. It's reprinted in Mastering the Business of Writing. Copyright © 1990 by Richard Curtis. All Rights Reserved.
- Richard Curtis
With few exceptions, advances are paid in installments. Part of the total money is payable upon signing the contract, the balance payable on acceptance of partial, complete, or revised manuscript; on certain calendar dates; on publication; and even after publication. Although the payout formula may be fairly simple when the advance is small, publishers and agents devote a great deal of attention to it when the stakes get high, The reason, of course, is the cost of money.
Although interest rates and inflation have (as of this writing in 2008, at any rate), remained stably below 10% in the last decade, even 5 percent per annum is worth fighting over and may indeed make a significant difference to the balance sheets of both publishers and authors.
Let's take a closer look at payout schedules installment by installment and sketch some ways authors may improve their position when the haggling begins.
* Payment due on signing of the contract. All contracts large and small require a consideration to be paid on signing, even if it be no more than one dollar, in order to bind the agreement. If the total advance is small enough, it may be payable in full upon signing. Most publishers today, however, have policies prohibiting payment in full on signing, and editors are ordered to defer some part of the advance when they conduct negotiations with authors or agents. Even if your book is a flawless gem requiring not a jot of revision, an editor may contrive to pay a second installment of your advance "upon acceptance of revisions" in order to satisfy company policy. Then, a week or two after requesting the signature installment, the editor will put through the acceptance installment as well.
If the contract is for an unwritten book, the advance will be divided at least into an on-signing payment and an acceptance one to give the author some money to live on while writing, and to create an incentive for him or her to deliver the work. The publisher may try to divide the advance even further, into installments payable on delivery of a partial manuscript or first draft.
You will have to do some solid reckoning before accepting too small an installment on signing, otherwise you'll run out of money before you turn in material qualifying you for the next installment. First you must subtract your agent's commission if any, then calculate the amount of time that will pass until you are entitled to the next payment. You then have to figure whether your living costs (including anticipated lump sum payments like school tuition, income taxes, or insurance premiums) during that period will be covered by what you collect when you sign your contract. A $50,000 advance may seem attractive to you, but if your publisher wants to pay you $10,000 on signing and it takes you six months to write the book, and your monthly living expense are $3,000, you're going to be up the creek halfway through the writing of the book. So you must bargain hard for a down payment that will sustain you until you've turned your manuscript in.
* Payment due on delivery of partial manuscript or first draft. These installments are generically known in the book trade as "satisfactory progress" payments. To help bridge the gap between the on-signing and the acceptance checks, and to encourage or compel progress, publishers frequently negotiate installments payable when the author turns in part of the book. A typical deal might be structured: one third on signing the contract, one third on delivery of half the manuscript, and one third on delivery and acceptance of the complete manuscript.
Of the many ploys cooked up by publishers to stretch out their money, "satisfactory progress" is the least effective, and if it weren't so dangerous it would be just plain silly. At the very least, "satisfactory progress" is satisfactory neither to authors nor publishers, and the only thing it does for progress is halt it.
In a "satisfactory progress" situation, an author faces a number of choices, all of them terrible. He can turn in a rough draft, which is usually an embarrassing mess that will send most editors into respiratory arrest, or at least provoke them to request revisions that the author would ordinarily make on his own when tackling the final draft. Or he can stop work in the middle of the book, polish and retype what he's done so far, and turn a partial manuscript in. Either way, he will have to suspend work on his book until he has received some feedback from his editor.
Even if his editor offers no feedback whatever, it may take weeks or longer to get that editorial reaction, and such delays are inevitably harmful to creativity and cash flow. If the editor does have criticisms, the author may be required to rework what he's turned in in order to get his hands on that money. To avoid all that hassle, therefore, an author may choose to forgo his "satisfactory progress" payment and forge ahead with the rest of the book, which defeats the purpose of such interim payments. Most authors do not polish chapters after drafting them, but prefer to finish a rough draft of the entire book and polish it in the final draft. Thus the time between the completion of a first draft and a final draft, or delivery of half the manuscript and all of it, may be so brief that the machinery for putting through the "satisfactory progress" installment will scarcely have begun turning when it will be time to put through the final acceptance payment. Furthermore, many editors feel it's silly to read a partial manuscript or first draft when the final product will be turned in a few weeks or a month later.
In short, "satisfactory progress" payments reflect little understanding of how authors work and pose a genuine threat to both the quality of a book and the timeliness of its delivery. Ultimately, this ends up hurting the publisher as badly as it hurts the author.
* Payment due on acceptance of the manuscript. Whenever possible, the balance of the advance on a commissioned book should be payable no later than acceptance. A number of contracts stipulate that a manuscript is deemed acceptable unless the publisher notifies the author to the contrary within a period of time, thirty days, sixty days, or thereabouts. This is a very desirable feature and one worth fighting for if it does not appear in the boilerplate of your contract.
In most contracts the definition of "acceptability" embraces revisions. If serious revisions are required by a publisher, the acceptance segment of the advance may be delayed until satisfactory revisions are turned in. If the revisions are minor, however, the publisher may often be prevailed upon to put through the acceptance money and take it on faith that the author will turn in acceptable revisions. There is an in-between state where revisions are necessary but the author cannot afford to do them without some sort of financial relief. In such cases the publisher may be persuaded to release some of the acceptance money to carry the author during the revision period.
I've expressed myself many times about the prevailing requirement in publishing contracts that an author must repay the on-signing installment of his advance if his manuscript is rejected. But in case you haven't read what I've said - well, I think it stinks. The on-signing advance should be regarded as a forfeitable investment, not a refundable loan. Needless to say, hard-headed (or hard-hearted) publishers see things quite differently.
* Payments due on publication. The purpose of publication installments is to enable publishers to start recouping what they've paid the author as soon as possible after disbursing his or her advance. Publication payments used to be the norm in American publishing. Then the rise of strong agents in the 1960s drove publication payments out of favor. But when money started to get expensive again in the 1970s (with double-digit inflation and interest rates), publishers pushed the agents back, and it is now common for publication installments to be paid. In some foreign countries such as England, the publication installment is still an article of faith.
The most common mistake authors make when agreeing to publication payments in a negotiation is failing to fix a time limit on them. Unacceptable language is, "$5,000 payable upon publication of the Work." Acceptable: "$5,000 payable upon publication of the Work or twelve months after acceptance, whichever date is sooner." The reason should become obvious if you think it through. Few contracts require publication of a book in less than twelve months after its acceptance, and many allow for publication in eighteen or even twenty-four months. Tacked on to these times are grace periods giving publishers an additional six months or more beyond the deadline to publish the work upon notification by the author that the deadline has passed. A publication payment may therefore not be due for as much as three years after a book has been accepted.
What is worse, publication of a book may be canceled entirely for any of a number of reasons: staff changes, new policies, or events or trends that date that book. That means that the publication portion of the advance will not be payable at all, at least not according to the publisher's interpretation of the contract. I don't know if the point has been tested in court, but it can certainly be argued that if you sell a book to a publisher for $25,000, and the publisher cancels publication, you still sold the book for $25,000 even if some of that sum was yet to have been paid, for the publisher's convenience, on publication. Therefore, whenever you negotiate a publication advance, you should always stipulate that the installment will be due on publication or X months after acceptance, whichever date comes first. The X is negotiable, but should be no longer than the outside date by which the publisher is required to publish your book.
* Postpublication payments. Publishers have devised a fascinating array of gimmicks to postpone the day of reckoning to authors. Among these is the postpublication advance. Such installments may be payable on a specific date - X months after publication, say - or, in the case of a hardcover-softcover deal, one installment may be payable when the hardcover edition is published, another when the paperback edition is brought out. There are other creative variations on this theme, but because a book begins earning royalties from the date it's shipped, all postpublication advances amount to the same thing: paying authors with their own money.
Authors may want to try to negotiate payout schedules advantageous to their income tax status. An author who has already made a lot of money in a year may not want to receive a large on-signing payment that same year. A deal can be structured, therefore, so that only a token amount is paid on signing the contract and the balance of the on-signing advance is paid early in January of the following year. Not surprisingly, publishers like such setups, since they enable them to legitimately keep authors' money for several months. Literary agents, however, are not always thrilled to have their commissions deferred just because a client is enjoying a good year, so I don't feel your agent is out of line to request his commission on the full on-signing advance now, and to take no commission when the rest of your money comes in January.
If you do want to structure installments in a way that you feel is advantageous to you tax-wise, and your publisher is agreeable to the arrangement, the time to do it is when your contract is negotiated. If a contract is already in force and you ask your publisher to defer until next January a payment that is due this October because you don't want more money this year, the Internal Revenue Service may disallow it if you are audited and your publishing contract examined. The same holds true of requests to agents to hold your money until the start of the next year.
The law makes it quite clear that money received by a fiduciary - a literary agent, for example - is construed to have been received by the author. This is not to say that publishers and agents do not hold money for authors in such circumstances, but getting away with it doesn't alter the statutes concerning "constructive receipt," and you may be liable for an adjustment in tax for that year plus interest and penalties.
Even if you are nothing more than a working-stiff type writer, it's still a good idea to get as much money up front as you can. A smart agent and a smart accountant will help you to structure your cash flow so that your hide is relatively intact every April 15th. Don't let publishers earn interest on your money. Remember, the sooner you get your hands on it, the sooner you can start blowing it on stupid investments.
This article was originally written for Locus, The Newspaper of the Science Fiction Field. It's reprinted in Mastering the Business of Writing. Copyright © 1990 by Richard Curtis. All Rights Reserved.
- Richard Curtis
Labels: Publishing in the 21st Century, Publishing Industry, Richard Curtis, Writers
