What’s the difference between option agreements and shopping agreements – and does it matter?

I have been asked this question so many times. You might be a producer who contacted an author or their agent about optioning a book and get told that they will only enter into a shopping agreement. Or you might be a producer who would be happy with either an option agreement or a shopping agreement, but you’re not quite sure what the difference is. Before you decide, it’s important to become familiar with option agreements and shopping agreements: what is the difference, and does it matter?

Option agreements.

Option agreements tend to follow a straight-forward formula. I have written about option agreements on my blog before. If you are new to option agreements, I recommend reading one of my blog entries about option agreements first. You could also start with a list of 10 things every party to an option agreement should think about: here.

In a nutshell, when a producer and a rights-owner enter into an option agreement, they agree the terms on which the producer is allowed to exclusively develop an audio-visual adaption of the underlying IP, which is typically a book. Crucially, they also agree what happens next: if the producer raises enough money to finance the film or tv adaptation, the producer will “exercise” the option – that means that the producer will get (by way of assignment of licence) the underlying copyright and intellectual property needed to adapt the original work for film or tv. The option agreement will already state the terms on which the producer will get the rights for the audio-visual adaptation. For example, the producer will pay a “purchase price” for those rights and the parties will typically also agree the net profits as well as the terms on which the producer may create any sequels or prequels, etc. In other words: the option agreement pretty much regulates everything – from the initial development, through to production and exploitation. If you want to read more about option agreements, you can do so here.

Shopping agreements vs option agreements.

Shopping agreements are much more flexible and don’t tend to follow a set pattern in the same way that option agreements do. As a minimum, the shopping agreement will also set out the terms on which the producer may develop the project. Sometimes there is an upfront fee involved, akin to the option fees in an option agreement, but sometimes not. However, just like in option agreements, shopping agreements also provide for a period during which the producer is entitled to develop the tv or film adaptation of the underlying work. During that period, the producer will try and find the relevant parties, i.e., co-producers, financiers, investors, scriptwriters and ultimately cast and crew.

Another key difference is that producers who have entered into a shopping agreement with the rightsholder, may need to get that rightsholder’s approval as to where they can “shop” the project around. The rightsholder may have to consent to the producer approaching certain parties. In other cases, the producer is free to contact third parties without the rightsholder’s prior approval. It is quite common that rightsholders might have to approve the financial and creative terms that the producer may want to agree with the relevant third parties. Equally, the shopping agreement might give the producer as much freedom as an option agreement typically would – in that case, the producer is entitled to approach and enter into contracts with any third parties to bring them on board for the further development of the project.

However, even if some shopping agreements do give the producer quite a lot of discretion for negotiating with third parties – akin to what option agreements do - what shopping agreements typically don’t do, is to agree the terms on which the producer may “exercise” the option. Exercising the option is the point where the producer pays the “purchase price” in return for the exclusive right to adapt the underlying work. This is typically when the producer starts moving into production and principal photography. This point – exercising the option and payment of the purchase price - doesn’t tend to be regulated in shopping agreements, which leaves a lot of room for negotiations. At the point where the producer has found all or most parties needed to fully finance and produce the project, the producer and the rightsholder will need to get back to the drawing table to negotiate the purchase price, net profit share, etc.

On the one hand, this allows the producer to negotiate the purchase price based on a more realistic estimate of the budget. Negotiating the purchase price and terms of the rights transfer at a later stage might also be preferable if the producer doesn’t know yet whether the adaptation is for cinema, tv, a streamer, or something else entirely. This is because option agreements tend to regulate all terms at the outset. On the other hand, agreeing the terms of the rights transfer at a later stage also leaves the rightsholder with a lot of negotiating leverage, as the producer is much more dependent – having done all that work so far and gearing up for production – on the rightsholder agreeing to the terms the producer is offering.

One way of dealing with the first issue – the producer not knowing what the final budget will be – is to draft the purchase price in an option agreement as a percentage of the budget, together with a “ceiling” (i.e., maximum amount) and a “floor” (i.e., minimum amount). Similarly, if the final format or medium of the adaptation is not known yet, some terms could also be left to be negotiated at a later stage “in good faith”. That way, most of the key terms are agreed and only some of the minor details are left to be negotiated. Whilst it may be difficult, or even sometimes impossible to agree all terms at the outset, in an ideal world doing so gives the producer the certainty that the rightsholder is on board and will not be able to hold up development, production or exploitation of the project at a later stage.

Summing it all up.

In summary, in the case of both shopping and option agreements, the producer gets a licence (i.e., is allowed to) to develop the project. Whether or not that licence is exclusive as well as the terms of that licence vary considerably between option and shopping agreements. Lastly, option agreements already set out the terms of the rights transfer needed to move from development to production and exploitation (as well as the purchase price payable for it), whereas shopping agreements don’t. If you want to find out more about them, please feel free to contact me here.