ARTISTS / BANDS SEEKING INVESTMENT CAPITAL 

 
Investing In Artists • 360-Degree Deals • Venture Capital For Bands
Do you know someone or a local business that has money to invest?  How do you obtain an investment when everyone believes music sales are dropping like a rock? 

If you place all your ideas, music and assets into a corporation YOU own, and if you pledge your rights, your services and every potential entertainment-related income stream to YOUR corporation, you may be able to sell shares to investors.

This post will show you how to create a Music Venture Investment presentation.  This post does not cover writing a business plan; I will cover that on another day.  This advice is for the artist or manager that has created a plan, and now he or she wants to know how to sell it to investors.

I have only worked on several music venture investments.  However, I have done similar deals on other non-music related projects.  This article should be regarded as general advice and it should be used as a foundation for discussion with a qualified attorney.

Your Corporation Is Your Extended Band
A corporation is a legal entity that holds all your assets.  It’s the best way I can think of to make a commitment to your bandmates, to your business team, and to your investors.  

Once formed, your corporation is your extended band and you should show it as much “love”, dedication and commitment as you did your unincorporated band.  It’s your legal bond to the people that support you and invested in you.  It’s been said that forming a corporation is like getting married; in many ways, that’s true.  Don’t accept someone’s money and don’t make promises to your corporation unless you are willing to put responsibility to your corporation first.

Because you must provide leadership and unwavering commitment to your own corporation, hammering out the agreements that govern your corporation, that specify how revenue and profits will be split, and the details that specify everyone’s obligations to your corporation are as important as anything you will ever do on the business side of the music industry.  

The Goals of Your Presentation
If you really want to attract investment capital you should demonstrate - by what you write and by the words coming out of your mouth - that you understand the gravity of the previous section titled “Your Corporation Is Your Extended Band”.  Beyond a great business plan, nothing pleases an investor more than dealing with someone that understands what RESPONSIBILITY TO YOUR CORPORATION means.  Here are some other things you want to demonstrate in your investor presentation:

• Honesty and integrity - It helps to have genuine recommendations from people that know you as an honest and dedicated person.  It also helps to have known and respected members of the community write you recommendations.
• Transparency - Show that you understand that information will never be withheld from those that you are obligated to share it with.
• Minimal bullshit - Don’t be afraid to admit you don’t know the answer to something.  Ask for assistance or volunteer to obtain the answer within the next 24 hours.
• Respect for money - You are asking for an investment; don’t say you don’t care about money!  If you did not care about it, you would not need it.  
• Demonstrate that you are a leader that can ALIGN EVERYONE’S INCENTIVES.  Aligning incentives is the most important part of creating your extended band.

Mutual Alignment of Incentives
One of the biggest problems in the music industry is the fact that the incentives of artists are typically not aligned with the incentives of record labels or investors.  For example:

• An investor or a label may propose to profit from music sales.  However, you may choose to give music away to drive traffic to your shows.  This puts you and the investor at odds.    
• Another example is when labels lobby to push down royalties.  Labels argue that exposure sells music and that higher royalties reduce exposure.  Alternatively, artists argue that royalties are the only way to earn a living.

When you negotiate a deal with an investor, you want to make sure that there are no hidden incentives; you should want 100% mutual alignment of incentives between you and your investors.

Achieving Alignment of Incentives
The easiest way to achieve alignment of incentives is for you (the artist) to assign all of your rights, services and income streams to a corporation that you and ultimately your investor(s) own together.  To do this, you will be asking an attorney to form a corporation and then you and your bandmates will be signing a Rights & Services Agreement that pledges all of your ENTERTAINMENT-related assets and services to YOUR OWN corporation.  Once you have placed all of your “incentives” into your own corporation, you are almost ready take on an investor.    

Letter of Intent (LOI)
As part of your presentation to an investor you are going to offer a DRAFT Letter Of Intent (LOI) to the investor.  The reason you are offering the LOI is to give investors an “inventory” of what they are getting for their money.  Remember, everyone has the general notion (right or wrong) that music sales are plummeting; so it’s important that you tell people, beyond your business plan, what it is they are investing in.   

Who To Include In Your Letter of Intent
The language of your LOI may have account for more people than yourself and your band.  Your LOI may have to include your manager, your illustrator, your band’s filmmaker, and everyone that is currently part of your elaborate plan (team).  Don’t worry; you can always include other people later.  I will cover how to expand your organization and how to divide up stock (equity) in another post. The bottom line: you are looking to prove to investors that everyone involved is 100% committed to your venture / corporation.

A Sample Letter of Intent
Here’s a ROUGH sample of a LOI written for a fictional band called Long Alley.

Put the words NON-BINDING DRAFT PROPOSAL at the top of your letter of intent.

To Whom It May Concern:

Thank you for taking the time to consider making an investment in our soon-to-formed corporation called Long Alley Incorporated.  

Long Alley is a team that includes (list band members and team members - one per line with proposed ownership percentages before each name.) 

Note: Young artists have a tendency to want to split everything evenly.  In a few weeks I will show you why this is not in the best interest of your team.  If you can’t wait, consider dividing up shares based upon individual commitments of time per year.

The attached business plan covers important items like target markets and promotion plans.  This draft letter covers the assets, the rights, and the services that members of Long Alley are willing to pledge to Long Alley Incorporated in consideration for obtaining the investment capital we need to execute our business plan.

 
The members of Long Alley are willing to pledge the following master recordings to Long Alley Incorporated.  (List names of recordings / completed songs.)

Long Alley intends to record the following songs within the next XXX days, and these songs will also become property of Long Alley Incorporated.  (List the songs.)

It is our intention that all of the new songs Long Alley writes and records over the next (X) years will become property of Long Alley Incorporated.

It is our intention that all of the revenue generated from (list ALL potential revenue sources covered in your business plan) will flow into Long Alley Incorporated; where it will be divided according to the terms of our agreement after subtracting the expenses also outlined in the attached business plan.

It is our intention (important) to invest XX hours of time each week (don’t over promise here) to achieve the objectives outlined in our business plan.

Note: The ability of each team member to invest TIME may vary.  Make a list of time commitments; this list should correspond to the equity splits (stock ownership) you are proposing.  You may have to value one person’s time more than another’s when you are doing your ownership calculations.

The members of Long Alley will work exclusively for Long Alley Incorporated for X years; however limited to entertainment.

 
The following assets will also become property of Long Alley Incorporated:

• Our name: Long Alley Band.
• Our website and website URL: www.longalley.com
• Our MySpace page and MySpace URL: www.myspace.com/longalley
• All Long Alley photographs and videos.
• The Long Alley logo

In consideration for pledging the rights, the services, and the assets just described, Long Alley is seeking an investment of $100,000.  The $100,000 will be used to fund our business plan and to pay the legal bills associated with securing this investment.

Note: This example letter is short and brief.  When you write your own letter, you should add enough language to make sure that the presentation goals mentioned near the top of this post are met.

 
Thank you for considering an investment in Long Alley.

 

Notes on Legal Strategy
Don’t let the attorneys suck up all your investment money negotiating your investment.  Try to iron out as much detail as possible on your own first.  If you have a sticking point with your investor, call him or her directly to resolve the issue; don’t have the attorneys do the back and forth negotiating.    

Make your best upfront effort to explain to your potential investor that your financial position requires you to have all legal fees covered as part of the deal.  You may even want to have a short signed letter that states that the investor will pay for all legal fees; even if the deal falls apart at the last minute; and with no exceptions.  Having legal bills hanging over your head is a sure way to loose control of your negotiating position.  

It is essential that you have your own attorney.  Do not represent yourself and do not use the investor’s attorney.  A smart investor will always make sure you have outside legal representation; this will also protect the investor from having you invalidate the deal due to inadequate legal counsel.

You Are Not Selling Shares, The Company Is.
I just want to make it clear that when investment capital comes in, it is not your money; the money belongs to the corporation.  You will not be able to withdraw compensation unless it was specified in your business plan and covered under the terms of your agreement.  

How Much Is The Band Worth Prior To The Investment?
If you have an interested investor that likes your plan and understands your commitment, the next hurdle to cross is how much of your company (stock) do you have to give up to obtain the cash you need to fund your plan?  For example, if an investor wants 50% of your corporation in exchange for investing $100,000 then he is valuating your company at $100,000 before his investment.  ($100,000 divided by (your $100,000 + his $100,000) gets you 50%)

There are a lot of factors that can increase your valuation, such as the genius of your plan, your current revenue, your popularity, and subjective factors such as how much the investor likes your music.  If this post is popular, I will cover this in more detail later.

Final Note
You are probably not going to be able to raise money if you plan on generating all your revenue from music sales.  You can still be an artist or a band, but you will need to have an elaborate plan that demonstrates how you are going to be entertaining on the Internet, and how you will build momentum for your brand.  The journey from here to wherever you are going will involve a multitude of people and multiple sources of revenue.  Forming a corporation, creating the RIGHT agreements, and learning how to manage the task of compensating partners with equity (stock) in lieu of cash are all part of managing in the music business in 2008.