A $2,000,000 film, tier by tier
Take THE LONG DRIVE, a $2,000,000 indie feature. It was financed with $700,000 of equity, $450,000 from pre-sales (deposits plus a bank loan against the balance), a $350,000 loan against a transferable state tax credit, a $300,000 gap loan, and $200,000 of deferred fees.
Two of those loans are paid off outside the main waterfall. The pre-sale bank loan is repaid when the two pre-sold territories pay their minimum guarantees on delivery, and the tax credit loan is repaid when the credit is sold (see transferable tax credit). Everything else waits for new sales.
Over three years, the sales agent licenses the remaining territories and $2,000,000 in license fees lands in the collection account. The fees and rates below are assumptions for this example. Real ones come from the signed deals.
| Tier | Payee | Calculation | Paid | Left in the pot |
|---|---|---|---|---|
| 1 | Collection account manager | 1% of $2,000,000 | $20,000 | $1,980,000 |
| 2 | Sales agent commission | 15% of gross $2,000,000 | $300,000 | $1,680,000 |
| 3 | Sales agent expenses | Capped at $75,000 | $75,000 | $1,605,000 |
| 4 | Gap lender | $300,000 principal + $45,000 interest and fees | $345,000 | $1,260,000 |
| 5 | Equity investors | $700,000 x 120% | $840,000 | $420,000 |
| 6 | Deferments | Crew and cast deferred fees | $200,000 | $220,000 |
| 7 | Net profits | 50% investors, 50% producer pool | $110,000 each | $0 |
The investors end up with $950,000 on $700,000. The producer pool gets $110,000, and any backend points promised to the director or cast are paid out of that pool, not out of the investors' half, unless a deal says otherwise.
Now run it at $1,200,000 in receipts instead. After tiers 1 to 4 ($12,000, $180,000, $75,000, $345,000) there is $588,000 left. Investors recover 84 percent of their money, no premium, and the deferments and profit tiers get nothing. That is why crew members with deferred pay should read where they sit.
Mistakes people make with waterfalls
The most common mistake is promising "first dollar" positions to more than one party. If the producer told the equity investor they recoup first and also told the gap lender the same thing, the CAMA negotiation turns into a fight. Draft one waterfall early and show it to every party before anyone signs.
Commission basis is the next trap. A sales fee taken on gross (as above) costs more than the same percentage taken after expenses. Distribution fees charged by a domestic distributor come out before the money ever reaches this waterfall, so the $2,000,000 figure is already net of those.
Where the waterfall connects
Investors will ask to see it in your film P&L and business plan, alongside the recoupment terms in their subscription documents. The equity financing premium, the gap financing rate, and the deferred pay position all come from separate agreements, and the waterfall is where they have to agree with each other. For a wider view of the capital stack, see film financing.