By: Matthew Kwatinetz

Over the course of the last few months, I’ve provided background to help each of you answer the question that I get asked most frequently by producers and artists: “Should I Start An(other) Organization?”. This question has no single answer, but is a function of discussing the three core issues of liability, funding and control which tend to be the driving factors for creating legal entities and determining their type, which most commonly is determined by tax status and/or governance structure.

Last month, I used the guiding principal of “Show Me the Money” to create a decision-matrix, a way of setting up key factors (decisions) to analyze the answer to a question based on outcomes—in this case the question of starting an organization. The two key factors in that matrix were the issues of (i) project vs. ongoing operations; and (ii) recoupment potential. This month, I will focus on control, and how the trade-off between risk and reward relates to starting a new entity. Just a friendly reminder that I am neither an accountant nor a lawyer—in other words, don’t try this at home without consulting a professional. At least that is my official advice.

Whether you are talking about a project or an organization, a creative dream or a financial one, you are going to need to answer some fundamental questions about control. The immediate response I get from most producers at this point: “Ah, yes, control—I want it.” But not so fast—better read the job description first, and understand what it means to sign on the bottom line. For me, issues of control are where the fun begins in this entity discussion, because each choice is based around predicting the future, and how actions now determine possibilities later.

There is an old truism that states: “authority is derived from potentially unrewarded responsibility.” Everyone starting in the business wants the upside of control: calling the shots, the VIP parties, the key artistic decisions. The (potential) catch is that those moments of authority are gained from previous moments of (perhaps painful) responsibilities—bills, union negotiations, sweeping up trash, medical emergencies. The key concepts here are basic: risk and reward. These two should go hand-in-hand: if you take the risk, you get the reward.

Risk can be indicative of an entire host of things, but in the domain of starting an organization it usually refers to equity in the form of time and money. When talking about “time” in this context, we are talking about unpaid or under-paid time: the theory is that in exchange for waiving cash compensation up front, one is promised a percentage of future revenues (This is also called sweat equity). Money, of course, is money. But specifically here we are talking about money that is put down up-front, when an organization’s only assets are probably an idea, a collection of variously committed individuals, and some papers. The money is the initial capitalization of the organization.

Based on that initial funding and sweat equity labor, the organization can begin its project or operations. There is a high risk to both those contributing time and those contributing money. The sweat equity workers are living on savings or working multiple jobs, and run the risk that they may never get paid if the organization does not meet its goals. The funders (or donors) may never recoup and profit from their monies (in a for-profit business) or conversely may have donated money toward achieving a mission or project that is never realized (in a non-profit business). Remember that funders are not always rich! This might be their savings, medical emergency money, or a mortgage on a home.

Given, then, that there is risk, there must be reward to incentivize potential participants. Risk is about a potential pay-off in the form of an outcome. The outcome can be a positive financial (for-profit) or social (non-profit) scenario, or some combination of both. But the reward promised in the outcome must be sufficient to make the risk worthwhile.

If I am an experienced producer, would I work without pay for an unknown organization? I might if there were a high probability of an outcome that rewarded me far more than being paid to work in a non-risky situation. Similarly for an investor (or donor), who will provide funding based on an assessment of possible outcomes and how those outcomes match their desires for a return on their capital (social and financial). In a for-profit, I refer to both the sweat equity workers and capital contributors as investors, a class of people who have a direct financial stake in the outcome. In a non-profit, sweat equity and donors (as well as staff, members, and key partners) are normally referred to as stakeholders. The stakeholder term is also used in for-profits, sometimes to refer only to investors, and sometimes to refer to a larger community of people tied to a given outcome.

Each of the stakeholders that has contributed to the entity is now exposed—this is another statement of their risk (see Part II of this series, “Liable to Hit or Miss”, in which we talked extensively about exposure and liability). Based on this exposure, stakeholders will want to be sure that control for key decisions and issues will be determined by the most qualified individuals. After all, they do not want to see their investment (or donation) go to waste! Because investors have contributed equity (sweat or capital), they will often feel entitled to control—it is crucial that you set the responsibilities for control clearly with all stakeholders before accepting money or unpaid time. As you create an organization, clear expectations to each individual about compensation in the form of control and pay-off will save you a great deal of headache later on.

However, don’t be greedy. Most people need stakeholders to be successful. And as a producer, it will never behoove you to take advantage of a stakeholder whether that person is an investor, donor, artist, partner, vendor, or audience member. The oldest rule in the book is the golden one, easily shortened “what goes around comes around.”

Moreover, remember that as you add incentivized investors and stakeholders you add leverage to your position: many hands make for light work. And just as long as I am spouting sayings, I will leave you with a final thought often quoted to younger producers who are struggling to assign control percentages to new deals: “10% of something is a lot more than 100% of nothing.”