How do we make that money money money? In this unit, we'll look at the primary methods for creating income for your creative practice. We're setting our focus on bringing money in, later units we'll focus on how we spend and manage those funds.

This unit is split into three broad categories:

• Financing - Funds provided by an individual or corporation, with a monetary return.
• Fundrasising - Funds provided on the basis of an agreement that expects performance, but not monetary return.
• Revenue Generation - Funds earned through the exchange of goods or services or through returns on business investments.

Sections
Financing
Fundrasising
Revenue Generation

In short, financing is convincing someone else to give you money and they get an I.O.U.

Here is a more official definition from Merriam Webster:

Definition of financing : the act or process or an instance of raising or providing funds

Parts
Debt Financing
Equity Financing

Put simply, debt financing is:

• A way to raise money
• An arrangement where someone gives you money with the expectation of return plus interest.
• The most common type of debt financing is a loan.

Pros:
You can raise money without having to give up ownership in your business.
Loan payments are usually predictable and can be planned for.
You can operate beyond your current means.
Cons:
It’s hard to get a good loan without collateral (i.e. assets)
Loan payments can deplete your cash flow.
Lenders have no real stake in your success. They just want to get paid.
In the end, because of interest, you will end up paying more.
Defaulting (failing to pay) on a loan can have serious consequences such as damaging your credit score or resulting in litigation.

• Collateral — Something pledged as security of a payment.

• Loan Amount — The amount borrowed. This is called the Principal

• Loan term — The amount of time you have to pay the money back.

• Interest Rate — What percentage you’ll pay back in addition to the loan amount (Principal).

  These rates can be:

  • Simple — Never changes. You the same payment every month until the money is paid back.
  • Compounding — Interest upon paid interest+Principal! (Think Student Loans)
  • Variable — Change according to market forces

• Amortized Loan — A loan with schedule payments that consists of both the principal and the interest.
• Deferred Payment Loan — A loan where the borrower is allowed to have the money immediately, but start to make payments at an agreed upon future date. This is essentially how your student loans work.
• Bond — This is used in investments. You (The investor) loan a company (the bond issuer) the principal and they pay you the interest on a regular basis.
• Line of credit — A preset amount a lender or bank has agreed to give you. You can draw from it when you need it, up to the maximum amount. This is what Credit Cards are for.

Simply put, equity investment is the act of selling a chunk of ownership in your business in exchange for funds. This is the entire basis for the show Shark Tank: entrepreneurs show this ideas off to the 'sharks' and hope that one of them will purchase a percentage of ownership in their company.

Why do people invest in a company?

• To have access to company profits without doing the work themselves.
• To exercise some control and leadership over the company.

Why would companies want investors?

• It’s an option to raise funds without resorting to debt financing, selling off assets, or cutting expenses.

1. Privately Sold Equity

• You own a portion of the company, and therefore are entitled to a portion of the profits.
• You are also responsible for a portion of the losses.
• This is common for private companies like Partnerships, LLC’s, S Corps and non-public C Corps

1. Publicly Traded Stocks

• If you are a public C Corp, you can sell shares in your company in a public stock market.
• Shareholders control is based on the percentage of shares owned.
• Shareholders are not responsible (or have limited responsibility) for losses.
• This option is only available to publicly traded companies!

The difference between publicly traded stock and equity shares is IMPORTANT…!

While financing is technically a form of fundraising, I've broken it awat from this section to drive home a point about gifts and grants:

• Grants and gifts are intended to provide support with no expectation of monetary return
• Debt and Equity require a monetary return

Grants and gifts are the bread and butter of non-profit corporations. Their unique setup with the US tax code allows them to more easily access and accept these forms of fundrasising—it is the number one reason that many choose to form a non-profit organization.

Parts
Gifts
Grants

For our purposes we're going to define gifts as follows:

Gifts: When something of value is given from one party to another without reciprocation.

Who can receive gifts?

• Anyone. The real question is: who gets taxed?

  Gifts to:

  • An individual — The donor pays tax (if the gift is over $15k)
  • A for-profit business — The donor pays the tax (if the gift is over $15k)
  • A not-for-profit organization — Tax-deductible for the donor! Tax-free for the organization!

In most cases in creative practices when we talk about gifts we're talking about tax-deductible donations

Tax-deductible gifts fall broadly into two categories:

• Monetary
• In-kind — The donation of physical property or of services.

Types of non-profit gifts: as classified on non-profit financial statements

• Unrestricted — Given to the organization with no real conditions
• Temporarily Restricted — Given for a specific purpose or intent
• Permanently Restricted — Org can’t spend the principal, but any interest the gift generates, they can spend. This is what powers endowments.

For our purposes, we're going to define grants the following way:

The transfer of something of value for a specific purpose or particular use.

How are grants different from regular gifts?

• Gifts are non-reciprocal
• Grants require performance
• If you receive a grant for an activity, you must carry out that activity or the funder may ask for the money back.

Where do grants come from? Generally, grants come from three common sources:

• Foundations — A non-profit, charitable organization that award grants to support specific activities.
  • Examples:
    • The Andy Warhol Foundation
    • The Kresge Foundation
    • The Knight Foundation
    • The Guggenheim Foundation
• Corporations — A corporation may dedicate a portion of funds via a subsidiary non-profit to support specific activities.
  • Examples:
    • The Coca-Cola Foundation
    • The PNC Foundation
    • Google Grants
    • Mozilla Foundation
• Government — Tax dollars set aside for specific purposes, awarded as grants.
  • Examples:
    • The National Endowment for the Arts
    • The National Endowment for the Humanities
    • Pennsylvania Council on the Arts
    • Allegheny Regional Asset District

Where does the money come from? Grant funds are generated in a number of ways. Understanding the difference between the sources of funding can help in determining the scale and scope of a request.

• Foundations
  • From Endowments — A principal, invested amount of money that generates interest every year. That interest is the amount of money that the foundation can use for grants. (A $1m principal produces approx. $50k for grants)
  • From Expendable Gifts — Unlike an endowment, this principal is spent until the money disappears.
  • From Donors — Some foundations have fundraising campaigns to generate the money they use for grants.
• Corporations
  • From business funds, usually profits
• Government
  • From your tax dollars

Here are three of the most common types of grants:

• Project/Program Grants — Funds a specific project or supports a distinct program
  • Example: Creative Capital
• General Operating Support — Funds overhead costs like salaries, rent, etc.
  • Example: The Heinz Endowments
• Artist Grants or Fellowships — Grants designed specifically to support an individual’s practice or mission.
  • Such as the MacArthur Foundation Fellows Program

What business structure do I need to get a grant?

• Technically, Any of the business structures we’ve discussed can get grants.
  • Grants to non-profits are by far the most common.
    • Why do you think this is the most common?
  • Grants to for-profits are more common with government grants.
  • Grants to individuals are hard to find, but not uncommon.

How will grant funds affect your taxes? There are different tax considerations for grants based on your business structure:

• Non-profits — Grants are considered non-taxable income
• For-profit — Taxes may apply, but taxable deductions are possible depending on how the funds are spent.
• Individual— Taxes may apply, but taxable deductions are possible depending on how the funds are spent.
• For-profits and individuals via fiscal sponsor — No taxes. You essentially are 'loaned' a non-profit's ability to be tax-free.

Fiscal Sponsorship? Individuals, partnerships and corporations can receive tax-deductible gifts if they have fiscal sponsorship.

• Fiscal Sponsorship — Sometimes called a fiscal conduit, is when a non-profit org enables you to use their non-profit status, for a fee, to accept donations and apply for grants.
  • Example: Fractured Atlas

Each grant maker is slightly different, but here is the general process:

1. Come up with a fundable idea
2. Seek out funding opportunities
3. If possible, meet with a program officer
4. Apply
5. Send a LOI — Letter of Inquiry and/or
6. Respond to an RFP — A Request for Proposals
7. If awarded, carry out the activity
8. Send in a Grant Report documenting project outcomes

We'll go over this more in D.6, but here are some overall tips: What makes a good grant?

• A strong argument for funding necessity
• Understanding a funder's priorities and goals
• Having clearly articulated goals and outcomes
• Writing for the right audience
• Consistency in language, tone and concept.
• Following the RFP requirements.
• Having a professional budget that matches the proposal narrative

Be a good steward of funding!

• Always act ethically when spending grant funds
• Keep an open dialogue with your program officer
• Invite funders to see the work!
• Credit funders appropriately on programs and signage. Many funders have these requirements in the grant award agreements.
• Follow-up. After completeing a grant and turning in the report, connect with teh pgoram officer to check-in and keep the relationship going.

1. Most funders don't like taking risks. Start with smaller grants and build that relationship. Once a funder sees you as a good bet, then go big and make the major ask.
2. Relationships with program officers pays off. Their job is to give people money, but remember that they are—in best-case scenarios—your collaborator, not your bank account.
3. Don't get discourages if you fail! Ask for feedback. There are many reasons why you did not get funded—it's not automatically because your idea was bad. You'll only find out by following up for feedback.
4. Apply! You'll never know if you don't try.

In the final of our three sections on income generation, let's quickly review our definitions for each of the broad categories discussed:

• Financing - Funds provided by an individual or corporation, with a monetary return.
• Fundrasising - Funds provided on the basis of an agreement that expects performance, but not monetary return.
• Revenue Generation - Funds earned through the exchange of goods or services or through returns on business investments.

In short, I want us to think of revenue generation as "everyday moneymaking." Financing and fundrasising tend to be more appropriate around larger projects, goals and initiatives—i.e. the need for them tends to ebb and flow. I like to think of revenue generation as something that is more on the active, everyday side of making money.

Revenue generation can also be called earned income. I've chosen to use the broad term revenue generation to help us avoid semantic confusion.

Earned income is the value delivered to your business that was the direct result of business transaction—the sale of goods and/or services.

• Earned income is money you’ve literally earned from a transaction. Two or more parties exchanged something of value.
• This income is taxable

• You work for someone who pays you

• You own or run a business

  [Source: IRS]

Parts
Active Income
Passive Income
Portfolio Income

Active income broadly covers two areas of revenue generation:

• Sales — A good (property in a fixed state) sold by one party to another party for a set price.
• Services — Actions performed by one party for another party, for a set fee.

— What are some examples of goods?

— What are some examples of services?

— Can you think of an example that incorporates both a good and a service?

Is it a good? A service? Or both?

• A sculpture

• A film

• An article for a magazine

• Providing vocals at a recording session

• A music license

• A theatrical performance

• A photo shoot for a magazine spread

• Curation of an exhibition

• A film screening

• A design consultation

• An architectural rendering

• Rigging an animated model

Two basic types of sales:
Direct	The seller deals directly with the buyer.
Indirect	A sale made via a third party. - Who can think of an example of a third party? - What’s the advantage for the third party? (Spoiler: Commission!) - Always keep in mind who the third party is working for.

The basic elements of every sale:
Two or more parties	Who is involved in this sale?
A consideration	What is being sold?
Price	What is the set value for the good that is exchanged?
The transfer of goods	When and how is ownership exchanged?
Evidence of sale	How do we know the sale took place?

(We're going to cover this process more extensively in a future unit)

Factors to consider when setting price:
Value Proposition	What is the promise of value for your good?
Cost-plus pricing	What is the price beyond cost-to-produce. What is the markup?
Rarity and demand	How many/much of your good is there? Do people want your good?
Competitors' pricing	What do your competitors charge? How are your goods similar? How is it different?
Opportunity cost	By selling this good, what alternatives do you lose out on?
Tax burden	What taxes will you owe from the sale
Type of goods	What are you delivering to the buyer? What is the value of that good? Does it come with full IP transfer? Is it just a license?

These factors cannot be considered in a vacuum. In order to create a justifiable and defensible price for your work, you have to take into consideration market value.

I covered this in the very first unit, but as a reminder market value is essentially just the amount for which something can be sold on a given market.

In what market are the following items valued and sold?

• Cars
• Stocks
• Cattle
• Music
• Bananas
• Banana hammocks

Price for generic goods is primarily set by a market’s supply and demand.

In general:

• More demand + less supply = higher prices
• Less demand + more supply = lower prices

But the goods produced by creative practices can range from generic to quite complex. Trying to determine the market value of art can be elusive, confounding, and is often secretive.

Basic factors for determining the market value of a piece of art: (via Artnet)
Condition — Is the art in the same condition as when it was made? Has it been altered? Restored? If so, by whom? Has the integrity of the work been maintained?
Provenance — The sales and acquisition history of an object. How much has it sold for? Who has owned it?
Comparables — What do similar works (by the same artist) sell for? Within the same medium? Within the same genre?
Subject Matter — Is the object’s subject matter unique or part of a larger body of work? A genre? A movement? Is it emblematic of an important period or moment of that artist’s career?
Rarity — The supply. How often and how many works by the artist appear on the market? Is this a singular work, an element of that work, or an edition?
Demand — Is there a market eager to obtain the work?

Let's take a deeper dive with this video from Christie's Education:

https://www.artsy.net/article/artsy-editorial-artworks-prices

Let's go back to our definition:

Services — Actions performed by one party for another party, for a set fee.

Let's put this in the context of some creative practices:

https://www.youtube.com/watch?v=DYaq2sWTWAA

Who can give a personal example of a time they've performed a service in a creative practice?

The parameters of a service agreement should be set forth in a service contract.

— The primary factors to consider in any service contract:

• Scope of work — The service should involve which specific activities? Which activities are not included?
• Deliverables — The specific result of the service. Literally what is delivered to the client upon completion of the service.
• Term — How long do you have to complete the work? What are the deadlines? Are there milestones along the way?
• Support — Who’s responsible for maintaining deliverables? Is the client providing any type of support (i.e. office space, materials, etc.)
• Fee/Rate for service — What do you charge a client?

Basically...

*but also... *

But for serious...

• Flat — One lump sum for the whole project.
• Rate — A fee based on units of time worked. i.e. hourly, daily, etc.
• Variable — Changes based on situations or markets. For example: a sliding scale based on company size.

You can mix and match these different fee types according to the project.

• Value proposition — What is the promise of value for your service?
• Cost-plus pricing— What is the price beyond cost-to-produce. What is the markup?
• Rarity and demand — What is the market for your services?
• Competitors' pricing — What do your competitors charge? How is your service similar? How is it different?
• Opportunity cost — By taking on one client, what alternatives do you lose out on?
• Tax burden — What taxes will you owe from a job? Did you know that contractors pay higher taxes?!
• Type of deliverables — What are you delivering to the client? What is the value of that deliverable? Is it full IP transfer? Is it just a consultation?

Workshop: But At What Cost?!

In brief, I wanted to include this concept but admittedly I don't have a lot to say about it. Essentially passive income is anything that makes you money on a regular basis, with no real participation on your part.

Here is a definition from Ivestopedia:

Passive income is earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS).

Make note of that. In addition to being a good way to boost your income, the IRS wants you to classify this income seperately from your active income.

I've picked three types of passive income that I think are relevant to creative practices: Rental property, income from a business investment, and royalty payments:

Do not confuse this with being a Real Estate agent—that's defined as active income because you are materially involved in the activity.

• If you own a property and are renting it out to someone (make sure there is a lease!), the rent income you make will be considered passive.
• One example of this is would be using AirBnB to rent out a room, apartment or house.
• The exception to this idea is the concept of 'self-renting.' I.e. you own a space (like your own house) and are renting that space to a business that you run. It's kinda double-dealing...

This comes into play when you are a limited partner or some type of equity investor. Remember Shark Tank?

• In this scenario, YOU are the shark
• Remember, to be considered passive income you cannot materially participate in the business.
• Essentially you're just collecting a check for your percentage of earnings.

This is the one I really like. Taking your intellectual property and setting it up to earn you cash in the background. Think of stock images, beat samples, graphic design templates and typefaces. People pay to have access to these items, but beyond setting up the website or license agreement, earning money requires no real effort on your part.

Here are a few examples:

• Performance royalties for a piece of recorded music
• Image use licenses for photography or artwork
• Copyright licenses for downloadable design templates
• Image Permissions for someone to use your likeness to sell a product or service (Fashion models)
• Franchise royalties to use a businesses trademark and methods (McDonald's)
• Limited permissions for a media company to use your video content on their website
• Publishing royalties for a written work (Through a publisher or self-published on a site like Amazon)
• Patent royalties on inventions
• Software license downloads for publicly available software

For more information, check out this article from upcounsel

Portfolio income, to my understanding, often gets mixed in with passive income. I've broken it out on its own because the IRS likes to see the distinction between the two.

Here is a definition from Ivestopedia

Portfolio income is money received from investments, dividends, interest, and capital gains. Royalties received from investment property* also are considered portfolio income sources.

*Note: investment property is different from rental property (passive income)

The difference between passive income and portfolio income is subtle:

• Passive income, beyond initial setup, generates revenue without any real additional effort.
• Portfolio Income usually involves you taking a more active role. For example, the buying and selling of stocks.

The most common versions of portfolio income are investing in the stock market or collecting interest on investments.