Negotiating the Option Agreement
The option process allows entities to share risk. A production company does not want to expend $25,000 on the purchase of a book and then find out no one is interested in getting the movie made. An option gives the producer the exclusive right to buy material (e.g. a book, an article, a screenplay, someone’s life story rights) in the future. For example, a producer options a rising star on the New York Times bestseller list in the hopes of buying rights in the book in the future once financing is secure.
Key Terms of the Option Agreement.
- Option Price – This number can be a little as a $1.00 or as high as the market will bear. Generally, the option price is 10% of the purchase price.
- Purchase Price – This number varies based on a wide range of considerations. For example, how popular is the work? Is the author a well-known commodity or an up and comer? What is the scope of the rights being optioned? All of these variables play in to the ultimate purchase price. The market is constantly changing and evolving so it is important to consult someone knowledgeable in the industry to ensure the price is fair.
- Option Period – The duration of the option. Generally, an option period lasts from 12 to 18 months, but extensions or renewals usually are included in the agreement.
- Grant of Rights – Defines the scope of the rights granted to the producer. The broader the scope of rights, the more expensive the purchase price will be.
- Renewal Rights – A renewal right gives the production company the right to renew the option for another term. An option is renewed when the producer notifies the rights holder (in writing and prior to the expiration of the initial term) of its intent to extend the option for another term. Sometimes upon the extension of the option an additional payment is made to the rights holder.
- Expiration of Option – If the option expires without being exercised, the rights holder keeps the option payment and all intellectual property rights to the underlying material. The parties essentially walk away.
- Exercise of Option – If the option is exercised, the production company pays the purchase price to the seller and buys the material. Sometimes the option payment is offset against the purchase price meaning that the buyer subtracts the amount of the option payment from the ultimate purchase price.
Always negotiate the acquisition agreement at the time you negotiate the option agreement (attach it as an exhibit). As the producer, you do not want to exercise the option and then be left with not the rights to the literary property, but the right to negotiate to purchase of the material. Structure the Option Agreement so that once the option is exercised the Purchase Agreement is automatically invoked.
For more information, contact The Law Firm of Stacey A. Davis at email@example.com or www.staceydavislaw.com