Option Agreements
facts on pacts list
option agreement
If a Development Executive loves your script and wants to buy it "Option" it. What does that mean?
The answer is although they say “they are buying it“, what they are actually doing, once establishing the purchase price (many times quite huge), they are paying for an exclusive rights period, at that purchase price, for 2-4 years, and will only give you a deposit or down payment and in essence “they are optioning it.”
There is no hard and fast rule about the fees due for an option agreement. In terms of the fee structure, you’ll first be paying an “option fee” for the “option period”. This is the money you pay for the exclusive right to try and develop your project based on the author’s content for a certain period of time, the option period. It’s difficult to give ballpark figures as they vary greatly from deal to deal.
Typically, there are two option fees and periods, i.e. the first option will be X amount for Y months, with the option of extending for another Y months for X amount. These are usually called the “second option fee” for the “second option period”. You have until the end of the last option period to ‘exercise’ the option. Typically, this is done when you’ve got the entire financing together and everyone is ready to shoot.
The purchase price is a one-off payment to the original rights-holder likely to form part of the budget you’ll raise to make the film happen. It’s usually payable on around the first day of principal photography. The difficulty for you as the producer is that when you negotiate an option agreement, you won’t know how much you’ll be able to pay the rights holder. Therefore the purchase price is often expressed as a percentage of the final budget – often with a ‘ceiling’ and a ‘floor’ which ensure that the author gets a certain amount, but not more than the agreed cap. This is often expressed as: “equal to []% of the Budget subject to the Purchase Price being a minimum of X and a maximum of Y”.
There is no hard and fast rule about the fees due for an option agreement. In terms of the fee structure, you’ll first be paying an “option fee” for the “option period”. This is the money you pay for the exclusive right to try and develop your project based on the author’s content for a certain period of time, the option period. It’s difficult to give ballpark figures as they vary greatly from deal to deal.
Typically, there are two option fees and periods, i.e. the first option will be X amount for Y months, with the option of extending for another Y months for X amount. These are usually called the “second option fee” for the “second option period”. You have until the end of the last option period to ‘exercise’ the option. Typically, this is done when you’ve got the entire financing together and everyone is ready to shoot.
The purchase price is a one-off payment to the original rights-holder likely to form part of the budget you’ll raise to make the film happen. It’s usually payable on around the first day of principal photography. The difficulty for you as the producer is that when you negotiate an option agreement, you won’t know how much you’ll be able to pay the rights holder. Therefore the purchase price is often expressed as a percentage of the final budget – often with a ‘ceiling’ and a ‘floor’ which ensure that the author gets a certain amount, but not more than the agreed cap. This is often expressed as: “equal to []% of the Budget subject to the Purchase Price being a minimum of X and a maximum of Y”.
It’s impossible to talk about anything in the film industry without mentioning credits! Typically, a book author will get a “based on a story by” credit, and screenplay authors will get a “written by” credit. If you agreed on a consultancy role for the author, the credit they get for this will also need to be agreed. To avoid complications further down the line, the credit should always be agreed upfront together with the commercial terms of the deal.
Many writers dream that someday their story or script will garner interest from someone who wants to develop it into a film or TV project. Usually, the first step is when that someone, maybe a producer or a production company or even a studio, offers the writer a contract known as an option agreement. As with all such matters where art meets commerce, I always advise that if you are asked to sign anything — other than an autograph — you should have your lawyer review it first. Every writer should have a literary agent and a lawyer advising them about their business dealings once they get to this stage of the process, where the creative spills over into the business world.
An option agreement at its most basic is a contract whereby the writer grants someone, for a period of time and for a payment, the right to make a film of the writer’s screenplay. The three main material issues that usually arise in negotiating such a deal are the length of the option period, the amount of the option payment and the purchase price if the project comes to fruition. How each of these issues will be resolved will vary depending on the negotiating leverage of the respective parties (i.e., whether the writer is a beginner or has had prior success in the industry and whether the producer is an experienced player or just a fledgling production company trying to get traction).
An option agreement will designate an ‘option period’ or length of time granted to a producer or studio to commence production of the project. It can range from six months to two years, or longer, depending on the negotiations. Such agreements frequently include additional periods of time for the producer to extend the length of the agreement in consideration of additional payments to the writer.
The option agreement will also set forth an ‘option payment’, which is the amount to be paid to the writer as consideration for allowing the producer the privilege of utilizing the writer’s screenplay for development purposes. Again, depending on the negotiating strength of each side, this could range from a very small amount (e.g., a few hundred dollars or even one dollar) to a larger payment (tens of thousands of dollars). Then, if the other party wants to extend the option period for an additional length of time, provision would be made for additional payments to the writer. In most cases, this additional payment will be negotiated to be more substantial even if the first payment is small.
The amount of the option payments will vary depending on the negotiation process and other factors such as the writer’s track record in the industry and the potential budget of the film or TV project. Some industry insiders have said that as a rule of thumb, option payments are frequently equivalent to 10% of the purchase price, but these amounts are always negotiable and writers need to be careful not to allow themselves to be taken advantage of in the rush of excitement that surrounds interest in their screenplay.
Another material term in an option agreement is the ‘purchase price’, which is the amount of money that the writer will receive in the event the screenplay is made into a feature film or TV project. The purchase price is often calculated on a sliding scale as a percentage of the budget, so as the budget of the film grows, so will the purchase price, although as with all negotiated terms, this too can vary greatly.
When properly negotiated, an option agreement can be a win-win situation for both the writer and the producer. The writer is paid to lease his or her screenplays for a limited period of time, while the producer attempts to get the project green-lighted by a studio or production company. If this happens, the writer will receive a nice purchase price for his screenplay. If it does not happen during the option period, then the writer keeps the option payment or payments paid to date and all rights to the screenplay revert back to the writer. The writer could then decide to option the script again to another producer.
From the producer’s perspective, an option agreement gives the producer an opportunity to hold on to a screenplay exclusively for a period of time, without having to lay out a lot of money up front while trying to get the project off the ground.
EXAMPLE
You have negotiated and agreed upon a purchase price of $500,000, for example. You agree to allow them an exclusive rights period of 24 to 48 months.
You receive 10-20 percent or $50,000-$100,000 upfront, similar to a down payment, with $450,000 due upon commencement of Principal Photography, which is the day actual production of the movie begins. There are optional extension periods of 12 month each, which can be for $10,000 each, for example.