Q. What is an “earn-out bonus”?
A. An “earn-out bonus” is an additional advance against royalties that is paid only if the total amount of royalties and subsidiary rights income payable to the author equals or exceeds the original advance. It is generally the result of a compromise between publisher and author on the amount of the advance when they are unable to agree with finality on a specific amount. Under this arrangement, the advance is set at the amount insisted on by the publisher (e.g., $75,000) but the contract provides that if and when that advance earns out, the author will promptly be given an additional advance in an agreed-upon amount (e.g., $25,000), which is also stated in the contract.
(Originally published in the Summer 2010 issue of the Authors Guild Bulletin. © Mark L. Levine)
Answers to questions on this site are general in nature only. You should consult a lawyer for information about a particular situation. For more information about book publishing contracts and issues, see Levine’s book.
Q. My book, which was published in hardcover about a year ago, earned out its advance by about $500 but the publisher has told me that it might hold back part of that money as a reserve against returns of the trade paperback edition that it is about to publish. Can the publisher do that?
A. A reserve against returns of a paperback edition should be withheld only from royalties payable to you on copies of the paperback that have actually been shipped to booksellers and wholesalers. If the paperback has not been published or shipped yet, there are no royalties payable to you on those copies against which a reserve can be established. Money received from other income, whether sales of the hardcover or the licensing of subsidiary rights, cannot properly be held back in anticipation.
All or part of the $500 can be kept by the publisher, however, if the amount it had held as reserves for the hardcover edition proved to be insufficient because the publisher got back more returns of that edition than anticipated. But if that were the case, it would mean that your advance had not earned out even though you and the publisher thought it had.
As with all questions answered in this series, of course, there could be specific language in your particular contract that would require a different result. The answers given here are based on language typically found in most contracts.
(Originally published in the Fall 2006 issue of the Authors Guild Bulletin. © Mark L. Levine)
Answers to questions on this site are general in nature only. You should consult a lawyer for information about a particular situation. For more information about book publishing contracts and issues, see Levine’s new book.