Please be sure to reconfirm your investment in Karaganda!
- Where can I get a copy of the script?
It’s available here: tinyurl.com/y4g6fylz . For a limited time, all investors who have confirmed their investment and are in good standing by 4/25/19 can request a hard copy of the script mailed free of charge to their address. If you would like your script signed, please indicate so.
- I saw something about investors in this offering getting priority payouts on any income. Can you explain a little more how that will work?
The “priority” refers to investors being paid profits ahead of the producers pool, AKA the class A members. As a class B investor, you are entitled to 115% of your investment before the producers share in the profits.
Please note that this structure is considerably different than most companies that publicly raise money, but is a standard structure for film investing as the only real asset of the company is its intellectual property (“IP”) and revenues therefrom.
At the lowest tier-budget ($396k), all of the money raised goes directly into the film, with the directors and producers and other above-the-line talent taking no fees during production nor any deferred payment, even though this will result in them not being to earn money elsewhere for a minimum of two months. In the event that we are short of the money to reach even this tier, we may have to borrow money or become indebted to crew members in the form of unpaid wages. There is also $12k in deferred payments for the script, both to Nina and Max, as a legal “consideration” to establish the chain of title. As the film’s expenses evolve and production gets underway, these numbers will be reviewed by a CPA and released to investors.
At such a budget tier, our strategy will be to sell the movie outright upfront (a buyout) to repay investors. Based on our inside knowledge, the film will be profitable in this budget range once completed if sold on an all-rights, all-territories basis to a streamer.
At the middle budget tier of $768k, all of the money raised still goes directly into the film, with the directors and producers and other above-the-line talent taking no fees during production. There is deferred compensation, however, that is roughly $90k, which will allow us to hire people who can help us with the distribution and connect us to higher-level talent.
At this budget level, we will still aim to take a buyout upfront to repay investors. We expect our margin in this case to be higher, and consequently there will be more profit to investors even with the $90k in deferred payments.
At the ~$2.4M budget level, there is considerably more deferred income, as we will need industry partners to help with gap financing (the “gap” between raised equity and target budget). At this tier, there are $52,200 in wages to above-the-line talent (director + producer). This is so these individuals can allot more time and more of their own resources to the project. In any scenario, the total amount will still be under $2.5M to comply with the SAG-AFTRA low budget agreement.
This film will be sold on a territory-by-territory basis to maximize profits.
Note that typical medium and large budget film projects allocate 5% of the budget in fees to the director, and another 5% to the producers payable during production. Thus, in every scenario the budget for Karaganda is streamlined as much as possible to raise the production level, maximize transparency, and increase the returns to investors.
Some people question whether anyone can make money in the film business, especially outside of Hollywood. Such suspicions are warranted because investors so often lose their money in film investments. As someone who is approached with low-budget film investment opportunities on a regular basis, I have yet to find a film other than my own that I personally would invest in. Statistically speaking, horror films have the best track record at lower budget amounts, and action/adventure films do best overall. Most lower-budget films tend to be coming-of-age dramedies, or other genres that are easier to make. They almost never have extensive fight scenes, detailed-looking custom sets, and Hollywood-level VFX. This has much to do with a common misconception: action films require huge amounts of money to produce. (Even my production mentors at AFI initially expressed the concern that we could produce our short with our SAG-AFTRA- mandated budget limitations.)
What makes Karaganda different from these other low-budget films is that it has already demonstrated its ability to create fight scenes, exotic sets, and VFX (as a proof-of-concept) at a near zero budget. This was only possible because of the level of talent both in front of and behind the camera. Films that are action/adventure and are high quality do well in foreign markets and can expect to earn 3x more overseas than in the U.S. That’s why action/adventure films that are well produced are solid investments.
Like the company Ferrari that can build a faster car than GM, quality is not strictly a function of resources. More important is the knowledge of the craft. This is especially true now that digital cameras have eliminated one of the most expensive parts of making a movie: buying and developing film. Based on studies, the most consistent variable that predicts the potential profit of a film is who the director is.
- I noticed I will be getting a K-1 each year. I really don’t want to mess with those for a lot of reasons. Any chance you will convert to a C Corp and just payout dividends each year?
I understand your concern about taxes, and we don’t enjoy dealing with this either. Please note that I am not an accountant, and that this answer is subject to change based on the recommendation of our CPA. Class B shareholders, according to the Karaganda operating agreement, do not own the actual LLC, but own the revenue rights to its principal asset, the film and its underlying IP, the script. Therefore we can issue payments in the form of a 1099. You may want to file a 1040 and declare this as a royalty payment. This 1099/K1 distinction makes no difference on the income side between owning the revenue rights or the LLC itself (since Class B is paid out first anyway). We copied this format from other corporations set up for film investment on Startengine. As for payments, I have used Square in the past to manage electronic payments to large numbers of people and digitally file the tax paperwork. We would like to repeat this for Karaganda, LLC. In the event we are forced to issue schedule Ks, or run into any other tax problems, we will convert to a C Corp. Like you, we want to minimize paperwork and we apologize for lack of clarity as having so many investors is new for us.
- This is my first movie investment. Can I assume that we will own a piece of this movie forever or what is the normal life of this type of investment?
As described above, we would like to avoid the situation of having the payments go on forever at the lower budget levels by making an all-rights deal with a streamer. Films are in many ways unpredictable. They can make a lot of money upfront, and then go quiet. And suddenly rights will expire after 5 years and a new deal can be gotten elsewhere. Also, films can sometimes catch on in foreign territories and unexpectedly generate significant amounts of money well after their release. When China Mobile put Max’s film Summertime in New York on their system approximately 5 years after production via a rights manager aggregator, there was a significant revenue boost. This film with its tiny budget, would not have been able to launch theatrically in China, yet found an audience on people’s phones. Needless to say, we don’t want to sell phone streaming rights in China until we’ve maximized profits through more traditional distribution methods first. But without an upfront deal, expect to be receiving payments at least for 10 years if not more. We can’t answer this question definitively now because we don’t know what buyout offers the film will get.
- You mentioned in your last update that you already have an idea for a sequel if all goes well. I assume that would be owned by another entity like this one but would we get any royalties or payments if a sequel gets made? Same question for a Netflix series or Broadway show How about the soundtrack album and other ancillary revenue sources?
It's entirely possible that the film’s IP will be bought out in preparation for a sequel or a series, and if that happens it will be paid out to investors. Because of legal issues, any large studio or production company would want the IP of the original film if making a sequel. I cannot say the likelihood of this situation happening, nor can I say what the amount would be. The LLC owns the script’s IP, however, not any one individual, so it would receive something in this scenario.
Excluding licensing of the film itself, I would not expect any ancillary revenue from the film in the form of a soundtrack or a Broadway show as this is very unlikely. A video game is a more likely scenario and worth far more, but still not likely overall. Revenue from screening on airlines is perhaps a better example of revenue that many investors are unfamiliar with, unlike pay tv and VOD outlets.
Another potential ancillary revenue stream is branded content, meaning we place advertising within the film or sell portions of the film for use in advertising. We have the connections to do this and have done this before, but the violent nature of the film may scare away potential sponsors. Also, unless we are at the top budget amount, it’s unlikely this revenue will be significant. But we will be able to maximize this potential revenue source should there be any opportunity. Whether the film will earn anything from branded content will be determined only after the film is produced.