Why an option for the next book is not in your interest

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For a long while I’ve contemplated posting the occasional commentary on various contractual provisions you might see in a publishing contract.  This is the first one.  Now, I’m a lawyer, true, and an author, but I’m not an expert, and this isn’t intended to be legal advice, as such.  More like legal musings based on my limited experience and that of close colleagues. Anyway, on to it.

Many book contracts today contain a “next book in the series option clause.”  In their standard form (EDIT:  I’m hearing from colleagues that the wording below is NOT standard, that what I’m setting forth below is a “hard” option, and that many publishers have something much softer — a right of “first look” or “first offer” or something mostly aspirational, any of which is much better), they look something like this (this is plain language, not legalese, so I’m taking some liberties and using some imprecise language to get the broad point across):

Within a certain period of time, Publisher shall have the option, but not the obligation, to purchase Author’s next book, and such purchase shall be upon the same terms and conditions as the purchase of the works purchased in this contract.

About the only good thing I can say about an option provision like this is that it minimizes the transaction/negotiation costs associated with the purchase of that next book.  After all, you’ve agreed in advance to the terms upon which you will sell it, so there’s very little to negotiate.  But therein lies the problem.

What a provision like this does is prospectively eliminate any negotiating power you may have if the book you sold to the publisher outperforms expectations.   Why?  Because you’ve obligated yourself to a set of business terms even if the book does very well, and the publisher has obligated itself to nothing, irrespective of the book’s performance.  But — and this is the big but — the publisher has given itself the right to purchase a big seller on the cheap.

The way to think about this is to imagine a universe of three possibilities with regard to your book’s performance.

Imagine the book sells below expectations (does poorly).  Obviously,the publisher won’t exercise the option.  Why would it?  It ‘overpaid’ for the first book, relatively to sales.  Instead, if it’s interested in picking up your next book (a big ‘if’, I imagine), it’ll offer financial terms less favorable than those you received previously.  Your standard option clause doesn’t subject the publisher to a purchase price floor so they can offer whatever they like (the clause does, however, subject you to a purchase price ceiling).

Now, if the book meets expectations, the publisher might very well exercise the option, though that will depend upon a variety of things.  In this case, assuming the initial deal you struck was fair and reasonable, the exercise of the option here doesn’t harm your financial interests directly (in that you’ll once again get a fair deal relative to sales), but it could harm you indirectly.  How so?  Well, the presence of the option will make it difficult (if not impossible) for you to shop the book to other publishers, and you might want to do that to see if you can get a better deal.

Now, imagine your book does well and sells beyond expectations.  In this case, the publisher will certainly exercise the option because the option allows it to purchase your book at far below the price it would command absent the option.  In other words, your ability to renegotiate the advance and royalty terms on the basis of the great sales (which you would presumably do, absent the option) is hamstrung by the fact that you already agreed to an advance and royalty arrangement that did not take account of those great sales (because it was based on a different set of sales expectations).

True, some publishers, in the interest of keeping a now popular author happy, might agree to increase the advance and royalties, but you don’t want to put your financial well-being in the hands of someone else if you can avoid it.  So, you know, avoid it.  

Now, there are ways to tweak option clauses to make them more author friendly, but that generally results in an option clause that’s full of aspirational language and no substantial obligations on either party (e.g., the parties shall meet and negotiate in good faith with respect to the business terms for purchase of the next book; if agreement cannot be reached within thirty days, then author shall be free to sell such book to a third party).  I don’t think this kind of provision is worth a whole lot, but it far better than the language I mention above.

As a rule, I think it’s best to simply sell the next book to the publisher at the outset (then both sides are taking a risk with regard to performance because someone is overpaid or underpaid if the book fails or exceeds expectations) or stay entirely silent about the next book and negotiate the new terms once sales from the previous books provide clarity on your negotiating position.

A final point:  It’s true that a lot of this would come out in the wash of royalties.  That is, a book that sells way beyond expectations will earn out its advance and throw off nice royalties.  There are at least two problems with looking at the issue that way — the first is the time value of money.  It’s always better to have a dollar in your pocket today (in the form of an advance) than it is to have a dollar in your pocket six months from now (when you get it in royalties).  The second issue goes back to negotiating leverage.  Imagine you sign a contract with an option like the one above and that also has a royalty rate of 8%.  It sells like crazy and the publisher exercises the option.  You’re getting 8% again.  But if there were no option, you might use your new found negotiating leverage to get a 9-10% rate.  In other words, the difference between the 8% and whatever you could have gotten for a new rate absent the option is lost money.

Long and short of it:  Think hard about this kind of provision before you agree to it.

 

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