am i going to have enough revenue to pay back my investors or the actors that have net profit participation points to answer those questions it's important to understand the waterfall not as in niagara falls sutherland or iguazu but as the term applies to film finance the waterfall represents the flow of revenues and profits from the consumer to the financial stakeholders at the top of the waterfall is the entire amount of money the film has generated and as we move down the waterfall we can see which entities investors and participants are prioritized and in what order they are to receive funds the concept could be applied to any business but it's extremely helpful with movies since they require a number of investors distributors and stakeholders each waterfall could be set up differently based on the contracts you've negotiated but to illustrate the idea i'm going to pretend that the first play fatelink produced fate of the monarchs has been turned into a feature film let's run an example waterfall let's say fate of the monarchs costs 250 000 to make all it to finance the movie we found five investors who each put up 50 000 in private equity our deal with them is that they will get their original investment plus a 20 return once they've been paid their original investment plus 20 percent return each of the five investors will get 10 of the net profits fate link the production company will get thirty percent of the net profits three stars of the film will each receive five percent of the net profits and the writer director will also get five percent of the net profits okay so those were the deals we made before stepping on a set then we went out made the movie and now it's time to find distribution and sign some more deals we decide to hire two sales agents on commission one to represent the film in the us canada and one to represent the film internationally each sales agent charges us a 10 commission on funds received by the production company our domestic sales agent charges us for expenses on her territories up to ten thousand dollars but our international sales agent does not charge for expenses in the end as fate would have it we premiere at a festival and get an offer for worldwide distribution from amazing distribution company so despite having two different agents we end up with one deal i'm doing this mainly to make our example waterfall a little bit easier even if it's not quite realistic our deal with amazing distribution company is that they're going to retain 25 of sales and we get 75 percent of sales but they're also going to charge us for their marketing expenses up to 25 000 they're not going to give us a minimum guarantee they're good negotiators but good news over the seven years that they distribute the film amazing distribution company earns 500 000 for it so the film doubles its money right not quite let's see exactly what happens with that 500 000 as we go through our example waterfall brief aside where did that 500 000 come from we're assuming that amazing distribution company went out and licensed the film to a few cable companies in different parts of the world then licensed the film to several streaming platforms they put the film on retail sites and sold dvds and blu-ray versions of fate of the monarchs and people bought the film as a digital download on a number of platforms that amazing distribution company found then negotiated and transferred the relevant files to those platforms whatever portion those platforms took as a percentage amazing distribution company never saw that money and that doesn't go into the 500 000 in revenue that i'm talking about now where does that money go in reality this money would have been distributed over those seven years but that would make our example extremely complicated so for the sake of efficiency i'm gonna assume one payment of five hundred thousand dollars it's also relevant to know that 400 000 of the sales came from the us canada while a hundred thousand dollars of the sales came from international territories okay so where does the money go first of this 500 000 our distributor is slated to earn 25 or 125 000 leaving the remaining 75 percent or 375 000 for us however the distributor used the entire 25 000 of expenses for sales and marketing so they will deduct that amount from the 375 000 owed to us leaving us with 350 000. now it's time to pay our sales agents as it happens both our domestic and international agents negotiated a ten percent commission but remember our domestic sales agent charged us ten thousand dollars in expenses as it turns out eighty percent of our sales were domestic and twenty percent of our sales were international that means that two hundred and eighty thousand dollars of our funds came from domestic sales and seventy thousand dollars came from international sales so we owe our international sales agent seven thousand dollars and our domestic sales agent thirty eight thousand dollars remember those expenses she negotiated okay so that leaves us with three hundred five thousand dollars of that amount we owe our five original investors their fifty thousand dollars back so fifty thousand dollars times five is two hundred and fifty thousand dollars so the good news is we've managed to pay back our investors now on top of their original investment each investor is owed a twenty percent return which would be ten thousand dollars each so let's go ahead and pay that ten thousand dollars multiplied by five investors now each investor has gotten their money back plus a twenty percent return which is fairly standard after we pay that we have only five thousand dollars left of that five thousand dollars the investors each get ten percent of net profits failing gets thirty percent and our three movie stars get five percent oh and the writer director also gets five percent so our investors would each get an additional 500 bucks fate link would get 1500 and each of the movie stars and the director would get 250 for this risky adventure of making a movie each investor has walked away with sixty thousand five hundred dollars fate link has scored fifteen hundred bucks and the stars and director made two hundred and fifty dollars in net profits and of course the stars and director were also paid a salary up front that came from the original 250 000 budget you can imagine one of the movie stars calling their agents and saying i know this movie only costs 250 000 to make and it may double that and yet i'm only getting 250 bucks am i getting screwed here according to the waterfall the way this particular film was set up the answer is no the paycheck given to the movie star is 100 correct but that's why it's important to pay attention during your negotiations and understand what each contractual provision might mean not only for yourself but for the other profit participators at the bottom of the waterfall as complicated as this example has been real life examples are likely to be even more complicated because there are likely to be ongoing expenses for the production company and possibly residual payments to actors as well depending on the contract that's been signed with talent but i didn't want to overwhelm you just give you an overview of the concept i hope this video has helped you better understand the idea of the waterfall as it applies to film finance if you enjoy the content please like the video and subscribe to our faithlink channel