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Shaudi is a Seattle-based musician, theatre artist, writer and social media marketing specialist. She holds degrees from Berklee College of Music and the University of Washington School of Drama.
At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.
If you’ve spent time exploring the world of film financing, you’ve likely encountered the terms “equity” and “liability.” Independent films are almost always financed by selling equity or incurring liability, and usually through a mix of both.
Each approach to funding has its own risks, advantages, and structural implications specific to the film industry.
In this post, we’ll break down both equity and liability in the context of film finance. We’ll compare their pros and cons and give real-world examples of both types of financing, with particular emphasis on independent films and first-time producers.
Since many first-time filmmakers rely heavily on equity to finance their projects, we’ll take an especially close look at the most popular form of equity finance in film, which is known as “the 120 and 50” structure.
Understanding the difference between equity and liability financing is a key foundation for exploring the many funding options available for your film.
Broadly speaking, equity investors provide upfront funding in exchange for a percentage of the film’s future revenue. In other words, the producer sells a portion of ownership in the project.
Equity financing carries significant risk for the investors, as there is no way to guarantee a film’s financial success. Investors may see a strong return on investment (ROI), or they may not recoup their money at all.
Equity investors can range from individuals—such as friends or family members of the filmmaker—to larger entities, including production companies and private equity firms.
Private equity firms pool capital from high-net-worth individuals and institutions, investing in businesses with the goal of generating a high ROI. Some firms specialize in film financing, while others take a more general approach.
While some individual investors may contribute because they feel personally connected to the project, private equity firms tend to be more commercially driven. They scrutinize a film’s market potential and typically expect a higher ROI before committing funds.
However, production companies and private equity firms also have the capacity to invest larger amounts than individual backers, making them valuable sources of funding, particularly for projects with higher budgets.
Equity investors provide funding for a film in exchange for a stake in its eventual profits. But what percentage of profits is considered standard?
To answer this question, let’s take a closer look at one of the most common ways to structure this type of agreement in the industry, known as “the 120 and 50” model.
In “the 120 and 50” structure, “the 120” refers to investors recouping their initial investment (100%), plus a 20% premium. After any debt obligations are met, revenues generated by the film go toward paying investors this 120% before other profit participants see a return.
For example, if an investor contributes $1 million under this structure, they will receive $1.2 million from the film’s profits before any funds are distributed to other stakeholders, such as producers and cast members, among others.
Once equity investors have fully recouped their initial investment, plus their 20% premium, the remaining profits are divided evenly.
50% goes to the investors as a group, while the other 50% is shared among filmmakers, producers, and other profit participants, such as cast members or writers with backend deals. This is where the "50" in "the 120 and 50" comes from.
This stage of the structure can get complex, especially when multiple equity investors and various profit participants are involved. To ensure transparency and fairness, it’s essential to have an experienced film finance team managing the process.
Equity financing for film carries significant risk for investors. Even a filmmaker with a strong track record of blockbusters can’t guarantee their next project will be a hit. If a film underperforms, equity investors may not fully recoup their investment—let alone make a profit. This risk is even higher for indie filmmakers working on their first or second feature.
That’s why “the 120 and 50” structure is widely used. By guaranteeing a 120% return before any profit sharing, it reduces financial risk for investors and makes the deal more appealing to them.
At the same time, it remains fair to filmmakers. Once investors have been fully repaid, the 50/50 profit split ensures that creators still receive a portion of the film’s earnings.
Because private equity investors typically require strong incentives to back a project, this structure has become a standard in independent film financing.
Liability in film finance refers to financial obligations incurred by a filmmaker or production company during and after production. This can refer to a wide variety of financial commitments for which production is responsible.
Types of liabilities can include debts, production costs, and legal obligations.
Debt financing can include loans, including bank loans, gap financing, and tax credit loans.
Securing financing from debt financing requires collateral. In the case of a tax credit loan, for example, the collateral used to secure the loan is the promise of tax credits from the specific incentive program you’re utilizing. Pre-sale agreements are another example of collateral that can be used to secure a loan.
These loans have to be paid back with interest.
Production costs are also considered a liability in film financing. This includes items like agreements for deferred payments for vendors, cast, and crew, in which individuals defer payment until after the film generates revenue.
Finally, legal obligations include any financial obligation the production must fulfill. This can include responsibilities like distribution agreements with minimum guarantees, union and guild obligations, and completion bonds.
Loans and debt financing play a crucial role in shaping a film’s financial structure, affecting everything from cash flow to budgeting to profit sharing agreements.
Unless you are able to secure all of your funding from a major studio, you’ll likely need to utilize some form of liability in filmmaking to help cover production costs.
However, it’s important to keep the significant risks associated with liability in mind.
As we’ve previously mentioned, it can be hard to predict the financial success of a film. That means the financial projections used to secure your loan may not align with reality.
For example, a film may not generate as much box office revenue as predicted. Or you might face an issue with your tax incentive or rebate program that causes you to not receive the expected rebate, or receive the funds much later than anticipated, leading to cash flow issues.
Unlike with equity investors, who only see a profit if the film performs well, debt financiers must be repaid regardless of the film’s performance. Loans need to be repaid, with interest, before profits are distributed to other stakeholders.
This can create a financial burden that affects a film’s profitability, potentially leading to significant debt and financial losses for the production company.
To structure a sustainable and effective financial plan for your film, it’s essential to understand the distinctions between equity and liability financing.
With equity financing, investors become partial owners of the project, as they are entitled to a share of the film’s profits.
In contrast, debt financing involves borrowing money that must be repaid with interest. Once the loan is fully repaid, the financial obligation ends—regardless of how much revenue the film generates.
Unlike equity investors, lenders do not have a long-term stake in the film’s success.
A key distinction between these financing methods is how they are impacted by the film’s financial performance.
With equity financing, investors only see a return if the film generates profits. Their ROI is directly tied to the film’s financial success, meaning they could either make a substantial profit or lose their initial investment entirely. In other words, their return is variable.
Debt lenders, on the other hand, are owed a fixed payment independent of the financial performance of the film.
In the repayment order, loan repayments take priority over profit distribution, meaning the debt must be repaid before any profits are distributed between equity investors and other stakeholders.
Equity financing spreads financial risk between investors and producers. If the film underperforms, equity investors may lose their investment, but the filmmaker is not personally liable to repay them.
However, failing to generate returns for investors can damage industry relationships and make securing future investments more difficult.
In exchange for sharing this risk, filmmakers give up a portion of the film’s future earnings, which could end up being a substantial amount if the project is a commercial success.
With debt financing, the financial risk falls primarily on your production company. You owe lenders repayment with interest, regardless of the film’s financial outcome, and if you’re unable to repay your loans, your production company could face legal consequences or even bankruptcy.
On the other hand, if the film performs well, debt financing can be advantageous, since lenders aren’t entitled to ongoing profit participation. That means filmmakers and equity investors retain all additional earnings beyond the loan repayment.
Equity financing offers greater flexibility and less immediate financial pressure, since investors don’t require repayment on the stricter timelines associated with liability financing. This can allow for greater creative freedom—such as additional time for reshoots or extended post-production—without the constraints of looming debt deadlines.
However, since equity investors are project stakeholders, they may expect the right to give input on creative or business decisions related to the project.
Debt financiers, by contrast, do not have a say in the film’s production or distribution. However, debt financing can limit flexibility due to rigid repayment schedules.
Additionally, carrying high levels of debt may hinder your production company’s ability to finance future projects if a significant portion of revenue is tied up in loan repayments.
Neither equity nor liability financing offers a perfect solution for funding every film. Each comes with its own set of advantages and drawbacks.
That’s why most independent filmmakers rely on a mix of both methods, ensuring sufficient cash flow for the project at hand while also sustaining their production company for future projects and long-term goals.
Balancing equity and liability in film financing is essential for maintaining financial stability while maximizing creative and commercial potential. By strategically combining investor contributions with debt financing, filmmakers can secure necessary funds, manage risk, and retain flexibility in creative decision-making.
Here are seven strategies for effectively blending equity and liability financing.
Leverage equity investors, including private backers and production companies, to fund the early development phase of your project, covering costs associated with writing, casting, and securing key talent.
A strong script, commercially successful talent, and a great pitch deck are among the assets you can use to lock in debt financing, such as bank and production loans, for both principal photography and post-production.
Using debt financing once a project is greenlit helps maintain the cash flow needed for the most costly stages of production. This liquidity keeps the production on track while also demonstrating financial responsibility to your equity investors.
To reduce reliance on equity and limit your debt exposure, consider selling distribution rights before production begins. This can be done through two main methods: pre-sales or a negative pickup deal.
With pre-sales, distributors agree to purchase the rights to your film for a set amount—known as a minimum guarantee—without providing upfront funds. Instead, they commit to distributing the film in specific territories (theatres, streaming platforms, VOD, etc.). You can then use these pre-sales agreements as collateral to secure production loans, usually for a slightly lower amount than the minimum guarantee.
The process works like this: your production uses the loan funds to make the film, the distributors pay the agreed-upon amount upon delivery of the finished product, and that payment is used to repay the production loan.
To cover your production budget, you’ll need multiple pre-sales agreements, typically facilitated by sales agents working in major film markets.
A negative pickup deal is essentially a larger-scale version of pre-sales. It’s an arrangement in which a single distributor agrees to pay an amount equal to or greater than the film’s production budget upon its completion.
Unlike pre-sales, where distributors purchase rights for specific territories, a negative pickup often involves a more extensive distribution commitment, sometimes covering all rights or major markets. Similar to pre-sales, producers can use a negative pickup deal as collateral to secure production loans.
Keep in mind that both types of deals can lead to creative input from distributors, since components like casting and story choices can affect a film’s marketability in a given territory, and distributors want to ensure commercial viability.
Film grants, rebates, and tax credits offered by many countries can significantly reduce the need for taking on excessive debt. These government-backed incentives make a project more attractive to equity investors by providing a reliable, lower-risk funding source.
By leveraging these incentives, producers can secure a portion of the financing upfront, reducing the overall equity required.
Just keep in mind that government grants and tax incentive programs can have complex requirements that must be met in order to receive funding. As such, thorough research and meticulous record-keeping are essential.
When pre-sales, equity investments, and debt financing aren’t enough to cover your production budget, gap financing can be the answer.
Typically utilized in the later stages of production to cover unexpected costs or to bridge funding shortfalls, gap financing allows producers to borrow against projected revenues, such as international sales. Since these loans rely on forecasted revenue rather than collateral, gap loans tend to be higher risk and carry higher interest rates than pre-sale loans.
While gap funding should never be relied upon for the majority of your production budget, using it in combination with pre-sales, equity, and other forms of debt financing can help keep a production on track.
Concerned about your production company’s ability to shoulder the full financial burden of your project? Entering into a partnership with a production company from another country can be an effective way to share the financial risk.
Co-productions can also open up additional funding opportunities, such as international grants and incentives, which you may not have access to without a partnership.
The terms of a co-production agreement can vary, particularly in how the financial responsibilities and creative control are divided. If you pursue this route, it's crucial to craft the agreement carefully from the outset to set the stage for a successful partnership.
If your production company needs upfront capital but doesn’t want to take on large production loans, you can offer equity investors a revenue share in exchange for their contribution.
This approach keeps liabilities manageable by reducing your budget’s reliance on loans and attracts investors who want to take a long-term stake in your film’s success.
Crowdfunding through online platforms like Kickstarter and Indiegogo can provide an alternative form of financing free from liability. While it can serve as a valuable supplemental equity option, it’s important to approach it strategically and realistically.
Relying solely on crowdfunding for all of your production budget is usually not feasible, but it can be effective for funding costs associated with later stages of production, such as marketing, finishing funds, or distribution costs.
An added benefit unique to this form of funding is its potential to generate audience interest. Contributors often feel a personal sense of ownership to the project and are therefore more likely to watch and promote the film, making crowdfunding a powerful organic marketing tool when used wisely.
The following breaks down several examples of films that used a hybrid approach for their financing needs.
The Blair Witch Project is a breakthrough low-budget independent horror film. Its fame and commercial success can be largely attributed to an innovative marketing campaign that helped drive the film’s popularity.
The film was created with an approximately $60,000 production budget by first-time feature filmmakers Daniel Myrick and Eduardo Sánchez.
The producers used a mix of private equity and personal credit card debt to fund this budget, maxing out their personal credit cards and securing funds from private investors for post-production costs.
Equity: The film received small investments from a group of backers who took stakes in the film, betting on its potential to generate strong revenue.
Liability: The use of credit card debt to fund some production expenses added an extra layer of personal financial risk.
After screening at the Sundance Film Festival in 1999, the film was acquired by Artisan Entertainment (now under Lionsgate Studios) for $1.1 million. It went on to gross $248 million worldwide, making it one of the most financially successful independent films of all time.
This case study illustrates the risks associated with liability. For instance, had the film not been selected for Sundance or secured distribution, the producers could have been left with substantial personal credit card debt and no film revenue with which to pay it.
However, the producers' financial management—securing equity investors to supplement their debt, executing a savvy marketing strategy, and benefiting from a bit of luck—demonstrates how effectively managing liability can lead to substantial rewards.
Paranormal Activity has a lot in common with our first case study—like The Blair Witch Project, it’s a low-budget found-footage horror film that became massively popular. Their funding structures, however, are very different.
The film was produced with an initial budget of just $15,000. It was directed, written, edited and produced by Oren Peli, who funded the film entirely through private equity and retained full ownership.
This approach kept the production both flexible and low-risk.
Equity: Peli and a small group of private investors covered all costs. There was no reliance on debt financing.
Liability: With a small budget and no debt financing, liabilities were kept to a minimum. There were no major studio loans or interest payments.
Acquired by Paramount Pictures for $350,000 and later grossing $193 million worldwide, this film serves as a prime example of how a fully equity-financed project can yield massive profits with minimal financial risk.
While experts typically advise against self-financing a film, Paranormal Activity demonstrates that in the right circumstances, it can sometimes pay off.
A key factor in keeping initial budgets low for both this film and The Blair Witch Project was having actors double as camera crew, which aligned with the “found footage” aesthetic. In these cases, it's important to ensure fair compensation for actors, including offering opportunities for profit sharing, which we'll touch on further in the next section.
Our final case study is quite different from the first two, both in terms of financing structure and the type of film it represents. It offers a helpful illustration of how equity and debt financing can work when blended together.
Mad Max: Fury Road is a high-budget action film featuring high-profile actors. It was directed, co-written and co-produced by George Miller.
Its approximately $150 million budget was funded through a mix of major studio backing, debt financing, and co-productions.
Equity: The film was presented as a co-production between Warner Bros. and Village Roadshow Pictures, who invested capital in exchange for distribution rights.
Liability: The film secured its debt financing by leveraging both banking institutions and government incentives available in Miller’s native Australia.
Despite facing financial difficulties during production, including going over budget, the film was a financial and critical success, grossing $380 million worldwide and winning multiple Academy Awards.
By blending studio equity with external debt, the film achieved high production values without imposing excessive financial risk on its investors.
These case studies highlight how low-budget indie films, such as Paranormal Activity and The Blair Witch Project, often rely on equity financing and relatively limited liabilities. By avoiding large institutional debts, the filmmakers gain creative flexibility and freedom unconstrained by strict financial obligations.
On the other hand, big-budget films like Mad Max: Fury Road tend to have the ability to combine major studio equity with structured debt. This approach spreads the risk—if the film underperforms, the studio has the ability to ensure lenders are repaid first, but if it succeeds, the studio benefits from the profits generated by its equity. There’s still a possibility for a high payoff, balanced with risk management.
As a producer, it’s essential to carefully evaluate your budget and financial structure to avoid overextending on debt. Doing so can help protect your ability to secure future projects and attract the investment necessary to bring your current project to life.
An experienced entertainment lawyer is a crucial member of your team when setting up financing deals. However, it’s also helpful for filmmakers to grasp the fundamental legal and contractual considerations involved in structuring the financing deals discussed in this article.
When investors provide funding in return for a share of the profits, formal investment agreements should clearly outline the following:
When securing film funding through loans, the following need to be defined:
Distributors frequently offer advances or minimum guarantees, so it’s essential for contracts to include:
For films with multiple production partners, contracts need to establish:
Financing deals with cast and crew members need to account for:
If a film is using government tax credits or subsidies, there must be legal agreements in place that delineate:
For the protection of investors, many films will require a completion bond, issued by a specialized company or insurance company specializing in film production. This completion bond ensures:
It’s crucial to balance equity and debt financing when planning your approach to funding a film. Each strategy carries distinct risks and rewards that impact investors, producers, and the film’s overall financial success.
With equity financing, profits are co-owned among investors and producers. For example, if you follow “the 120 and 50” structure we outlined earlier in this article, those profits would be split 50/50 between producers and equity investors.
When using equity funding, there is potential for high ROIs, but also a risk of losing the entire investment if a film underperforms.
With debt financing, lenders must be repaid, regardless of the film’s profits. Once debts are cleared, however, investors and producers retain all future profits.
For most indie filmmakers, a hybrid approach utilizing both equity and liability will be the best bet for spreading risk while maximizing the potential for high financial gains.
The way a film is financed directly influences its distribution strategy and revenue potential, as different funding sources come with varying levels of control, risk, and financial obligations.
Some equity investors will be happy to act as silent partners—providing funding but deferring to the producers on any creative or business decisions.
Some equity financiers however, particularly those who specialize in the film industry, may seek to protect their investment by having a say in important project aspects like casting, distribution deals, and marketing.
For example, an equity investor might seek approval rights over your distribution deals in order to advocate for a distribution strategy that maximizes their ROI. Or they might insist on casting a known actor with proven commercial draw over a less-known performer with less of a track record.
This type of involvement has led to conflicts on many productions. To minimize the potential for issues like this, it’s vital that the equity financing agreements discussed in the previous section clearly define who has the final say over these decisions.
With debt financing, your initial revenue streams (from box office returns or streaming deals) will usually go toward loan repayment before you and your investors see a profit.
This can significantly impact cash flow, so it’s imperative to set clear expectations with equity investors and plan ahead for funding future projects.
Speaking of equity investors, securing pre-sales can be a great way to demonstrate the commercial viability of a project to them. While pre-sales can help secure loans, which are a form of liability, they also serve as a tool for mitigating overall financial risk and making your project more compelling to equity investors.
Diversifying funding sources is key to reducing financial vulnerability, particularly for first-time feature filmmakers. As we’ve covered in this post, a blend of equity and debt funding can complement each other—such as using tax incentives as loan collateral or pre-sales to attract more equity investors.
Creating a realistic budget that allows for contingencies is a great defense against financial overruns, protecting both equity and debt stakeholders. To achieve this, invest in a robust team of accounting, sales, and legal professionals to ensure accurate cost projections and fair distribution deals.
A deep understanding of your project is another essential component of structuring a funding plan that minimizes risk. Research financially successful films with similar talent and budget needs, and study how their financial plans are structured.
While there's no one-size-fits-all solution, understanding the strengths and uses of each funding type can guide you toward a balanced approach that maximizes rewards and minimizes risks.
Putting together the right mix of equity and liability funding for your film is all about balancing risk, reward, and creative control. With the right strategy and professional guidance, you’ll be equipped to navigate the complex world of film financing with confidence.
To learn more about how production incentives can support your financing and budgetary needs, head over to our Production Incentive Center and explore what each state with incentive programs has to offer.
