What’s an Option Agreement?

You’ve written a screenplay and it’s garnered some interest. You’ve read a script; you think it’s the next Big Box Office smash and you want to produce it.  What’s the next step? Typically, your next step is to consider something called an Option Agreement.

An Option Agreement is simply a contract between the original owner of a specific work (e.g., a novel or a screenplay) and a producer (e.g., a production company or a network) (often referred to as the “purchaser”) interested in producing the work and turning it into a film, play or television series. The purpose of the Option Agreement is to give the purchaser the exclusive ability (option) to purchase the rights in the work during a limited time. An Option Agreement typically includes a set purchase price to be paid to the owner should the purchaser exercise its option. 

But why would a producer want an option to purchase the rights, instead of purchasing them outright in the first place? Well, before purchasing the rights of a creative work, an Option Agreement gives the producer a set amount of time to secure financing, develop the project, and determine whether it is something they want to pursue (i.e., whether there is a market for the material). This can also be beneficial to the owner, because if the purchaser never exercises the option, no rights or ownership interest is ever transferred. Once the option period expires, the owner has an opportunity to entertain other offers and keep the option fee (typically, 10% of the purchase price).

Here is a basic, non-exhaustive, list of some crucial provisions that should be included in any well-drafted Option Agreement. Remember, as with any deal, all terms can be negotiated between the parties.

1. 1. 1. Option Fee: This is the only guaranteed money the owner will receive.

   1. 1. Option Period: The exclusive period of time the purchaser has to exercise the option.

   1. 1. Purchase Price: The larger payment due to owner if the purchaser exercises the option (decides to buy).

   1. 1. Grant of Rights/Reserved Rights: The rights that are granted to the purchaser and the rights that are expressly reserved (kept) by owner (e.g., sequels, prequels, exploitation in other media, etc.).

   1. 1. Applicability of Option Fees against Purchase Price: In some cases, the option fees are applicable against the purchase price; this means these fees can be deducted from the Purchase Price upon exercise of the option.

   1. 1. Set-Up Bonus: An additional fee paid to the owner if the purchaser enters into an agreement, for the development or production of the work, with a third party.

   1. 1. Contingent Compensation: The owner will normally request profit participation.  The purchaser may grant a “net” profit participation which is typically between 1.5% and 5% of net proceeds.

   1. 1. Credit: If the production is non-guild, or if the optioned property is not a screenplay (e.g., a book, unpublished manuscript, article, etc.), credit will be determined through negotiation of the parties.  However, if the optioned property is a screenplay by a union member and produced by a guild signatory, credit will be governed in accordance with the WGA (Writer’s Guild of America) rules.

   1. 1. Reversion: The owner may typically demand the right to reacquire the property, if the purchaser exercises the option but fails to produce it within a period of time (typically 3-7 years after the option is exercised).

   1. Consultation: The owner may be paid additional fees to provide consulting services (advice) during production.

Whether you’re the owner of a creative work, or a producer attempting to its secure rights, an Option Agreement can be a very useful document to protect your interests.

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