Once you receive a contract, you will probably first flip ahead to the page that states how much you will be paid. After all, you have put a lot of hard work into this manuscript, and though you are pleased that it will be turned into book form, you want to know what your compensation will be. Though your editor has most likely already discussed this with you, it is just a good feeling to see it in writing.
There are two basic types of compensation: flat fee and royalty basis. The flat fee is given in cases of a work-for-hire. This is pretty straightforward: you are paid a set amount of money for writing a book and turning over all rights to the book. You do not receive any further payments.
On the other hand, if you signed a contract to receive royalties, then you will receive royalty statements detailing what monies you are entitled to. They will show how your book is selling and the amount of royalties being paid to you, based on the percentage agreed upon in the contract. Check these statements carefully to be sure you are getting what you deserve. While a publishing company is not likely to cheat you, mistakes can be made. Your agent will be better prepared to interpret royalty statements than you are. Also keep in mind that while you may have earned the money several months earlier, the check may take a while to get to you. Normally, publishing companies cut royalty checks twice a year, some annually.
The advance is just what it sounds like — an advance payment on the money you will earn from the sales of your book.
Let's say you have written a middle-grade novel. The contract states that you will be given an advance of $4,000 for this manuscript, half to be paid on signing of the contract and the other half to be paid when the manuscript has been received and deemed acceptable (acceptable meaning that you have fulfilled your contractual obligations, in the judgment of your editor).
If you have written a picture book that was illustrated by someone else, then you will have to split the royalties with the illustrator. Normally the royalties are divided equally. So if the book had been receiving a 10 percent royalty, then you would be paid a 5 percent royalty.
This is money you would be entitled to once your book is published and begins selling. Your book must earn back the advance before you can begin collecting royalties on it. In the above case, your novel must earn $4,000 in royalties before you get any more money.
Royalties are traditionally paid on the list price (suggested retail price) of the book, which means the price you would pay as a customer buying the book. Some companies do, however, pay royalties based on the net price, or the amount of money the publisher retains on each book after expenses. Net price takes into consideration discounts that are often offered to buyers, which can come down below half the retail price, as well as other expenses to the publisher. If the publisher has the right to calculate net, and pays you on that basis, then the possibility of your evaluating the fairness of your statements is reduced. To compensate for these factors, your royalty percentage should be higher if it is based on net than if it is based on list.
Let's say your middle-grade novel will earn royalties based on the list price. To keep things simple, we'll say that your novel's retail price is $10. Your contract states that you will receive a 10 percent royalty on hardcover editions. So, for this example, you would receive $1 per hardcover book sold. Now, you need to figure in the advance:
Advance (4,000) divided by royalty per book (1) equals number of books to be sold before the advance earns out (4,000).
Before you will receive any more money, your book must sell 4,000 copies. Beginning with copy number 4,001, you will begin receiving $1 per book sold.
To make this even more complicated, paperback editions of hardcover books normally have a smaller royalty even though the text is exactly the same. Publishers have to do this because the retail price for paperbacks is lower but the costs to produce the book are still high.
You may want to inquire about an escalator clause in your contract. An escalator clause states that once your book sells beyond a set number, the royalties will increase. It certainly doesn't hurt to ask. Check with your agent about the possibility of negotiating for this.
Let's say the contract states that you will receive a 6 percent royalty on the paperback edition of your book. So if the paperback edition of your book sold for $5, then you will receive 30 cents per book sold. In this example, you would not need to calculate in the advance since the hardcover edition had already earned out the advance. But what if it hasn't? Sometimes the contract will specify that the paperback sales must pay back the advance, if the hardcover hasn't done so. This could be a negotiating point.
You can already see some of the complexities of contracts. If you landed your book deal without an agent, you might want to get one at this stage, to help you understand and negotiate the contract being offered. Also, at the moment you are offered a contract, you are eligible to join The Authors Guild (