Contract Basics: Finances (part 1)

Let's discuss the part of the contract I know many of you are most interested in: finances. Exciting as this topic is, it includes many different pieces, and therefore can become quite complicated, so I'll be splitting this topic into two posts. Remember that you can bookmark them for future reference!

The Advance:

• Your advance is money that will be paid to you before your book begins earning royalties (i.e. "in advance"). It will need to be earned out by royalties before you earn anything further from book sales.
• For instance, if your advance is $300, and you earn $0.30 per copy, you would need to sell 1000 copies to earn out your advance. From your 1001st copy on, you will receive further royalties beyond those $300.
• If your book fails to sell 1000 copies, however, you get to keep the $300 (unless there's something really fishy in your contract, so as always, read carefully!).
• Your advance is almost certainly going to be split into either 2 or 3 payments, tied to concrete moments: contract signing, delivery & acceptance, and publication. The splits do not have to be weighted equally, though they may be. The amount of your advance shouldn't change based on how it's split, though everything is negotiable.
• The absolute best version for you as the writer is to have the advance split between signing and delivery & acceptance, especially since publication can frequently take up to a year after your final, proofed manuscript is accepted, which could take six months or more after signing your contract. It is even better if your advance isn't weighted 50% – 50%, simply because you are paid sooner.
• Remember, however, that there are instances in which you'd be required to return any advance money paid if your book ultimately isn't published.
• The advance could also be split between delivery & acceptance and publication. This means you will not receive any money for all those months between signing your contract and when your manuscript is accepted.
• As a first-time novelist, though, this may not be the part of your contract to really push—the publisher is limiting their risk in the case that you, as a first-time writer, are unable to deliver a publishable manuscript, which is understandable.
• On the other hand, you could push for a front-weighted split, e.g. 70% on acceptance, 30% on publication.
• The final option is for the advance to be split among all three points. In this case, the publisher will almost certainly prefer a back-weighted split (e.g. 20% on signing — 30% on delivery & acceptance — 50% on publication), though all advice for writers recommends flipping that kind of order around.
• This becomes even more complicated if your contract is for more than one book. The quick tip is that you want each book accounted separately. This means that money you receive for one book is independent from money you receive from the other.
• Let's say you have a contract for two books, with a $5,000 advance for each, split 50/50 between signing and delivery & acceptance. You should receive $2,500 on signing for book one, and $2,500 on signing for book two. Then, you should receive $2,500 when book one is accepted, and another $2,500 when book two is accepted. Not too complicated.
• Where it becomes trickier is earning out your advance:
• If your books are accounted together, you have to earn the full $5,000 in royalties from book one, before you receive any royalties toward book two. If your first book doesn't sell too well, and your second book is a bestseller, you still won't earn any royalties from book two until you've earned out the full $10,000 for both books.
• If your books are accounted separately, the sales from book one will slowly accrue until they hit the $5,000 mark. Meanwhile, the sales from book two could have earned out their $5,000 and be making you further money on top of that!
• Keep in mind, this is for books contracted together, not for option books, which will be discussed later.

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Royalties:

• Royalties are the percentage of every sale which will be paid to you. Royalties can be different for every format of your book – one percentage for e-book sales, another for paperback, and yet another for hardback.
• Royalties can be calculated based on the cover price (the amount the book is sold for, e.g. $2.99 for an e-book), or based on net received—the amount the publisher actually received from the sale.
• For instance, for a book sold at $2.99 on Amazon (at least through Kindle Direct Publishing), net received is about $2. If your royalty is 25% of e-book sales based on cover price, you would receive about $0.75 per copy sold. If it's 25% based on net received, you would receive about $0.50 per copy sold. To get the same $0.75 based on net received, your royalty would have to be about 37%.
• Various discounts are offered to retailers, so your royalty amount based on net can be very difficult to predict.
• Obviously, if the percentages were the same, it would be greatly to your benefit to base royalties on cover price. Because of this, royalties offered based on cover are usually lower than those offered on net. However, sometimes publishers know new writers aren't paying attention, so they offer a royalty based on net that they would normally offer based on cover.
• So, and I've said this a lot, read carefully! Also, if you're offered a royalty based on net, try to do the math and consider negotiating. You could even try convincing the publisher to base royalties off of cover, just for easier accounting on your end, though remember switching from net to cover will drop the percentage.
• An e-book royalty percentage should be higher than a print percentage because of the lower production cost.
• You should also negotiate an escalation in your royalties. For instance, if we use that same 25% for e-book sales, it could escalate to 30% after 5000 copies sold, and 35% after 10,000 copies sold, or to 35% right away, etc. All of these numbers vary based on the specific offer you receive and how comfortable you feel negotiating.

More coming soon! Meanwhile: 

Questions? Thoughts? Corrections? Please leave them in the comments!

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This post is a part of my Publishing Contracts sequence. Please click here to learn more about it and view the very important disclaimer.