M and N Mean Net Royalties – Show Me the Money!

Today we’re taking a moment to “Show you the money” – and explain why authors don’t want to hear the word “net” in connection with royalties.

Royalties are the money an author receives from a publisher under a publishing contract. Sometimes the author also receives an advance, which is usually an up-front, lump-sum payment against future royalties due. When authors receive a standard advance, the author receives no additional royalty checks until the author’s share of sales exceeds the amount of the advance.

Generally, publishing contracts calculate royalties in one of two ways:

Gross royalty calculation (sometimes phrased as calculation on “list price” or “price received”) means the author’s share of sales is based on amounts the publisher receives, with no deductions. A gross royalty contract calculates the author’s royalties on the basis of the publisher’s list price for the work or the money the publisher receives on sales of the work in various formats. This is the best form of royalty for the author.

Net royalty calculation means that the author’s share of royalties is based on some amount less than what the publisher actually receives. The contract should specify exactly what expenses the publisher can deduct and/or credit against sales. An unspecified “net royalty” provision is dangerous for the author, because it doesn’t limit the publisher’s ability to reduce receipts (and therefore the author’s royalties).

The language to watch out for is a royalty provision which reads, “Publisher will pay Author royalties of X% of Publisher’s net receipts (or profits) on sales of the Work.” Paraphrases of this language are equally bad. Wherever a contract uses the term “net,” authors should ensure that the word “net” is thoroughly and specifically defined and that any publisher deductions are based upon “actual, documented” costs – not estimates or figures the publisher doesn’t have to explain.

Not all net royalty contracts are attempts to defraud the author – some reputable publishers do use them – but authors must be very careful about agreeing to royalties based on net, and should never do so without professional advice.