Q&A: Cross-collateralization

Q. What is cross-collateralization, and is there a cure?

A. Cross-collateralization is an accounting concept (stay with me here) used in publishing agreements (and also commercial loans). It refers to the right of the publisher to charge your royalty account for any amount owing to the publisher under any other agreement. Unfortunately, many writers fail to understand the impact cross-collateralization can have on their royalty income.

Let’s say you have just submitted your third novel, KILLING MADLY, to your publisher. Your first novel, KILLING SPREE, sold well, but your second, KILLING FRENZY, earned out only $10,000 of its $12,500 advance.

Under the terms of your current publishing agreement, you are to receive a $15,000 advance for KILLING MADLY, upon acceptance. But when the check comes, it’s only for $12,500 – the publisher has deducted the $2,500 shortfall from KILLING FRENZY. (Alternatively, the publisher might pay you the full $15,000 advance, but after it is earned out, it deducts the $2,500 from future royalties.)

Why? Because you have this clause (or one like it) in your publishing agreement: “all Works covered by this Agreement or any other agreement between Publisher and Author shall be considered one account and shall be accounted for jointly or collectively.”

What could you have done about it? Ideally, you could have struck out the offending clause, usually found under headings such as Payments, Royalties, Overpayment, or Accounting. Some publishers, however, won’t delete it, so you’ll have consider the negotiating points and issues:

  • If this is your first agreement with the publisher, the clause won’t matter until and unless you sign another agreement with the publisher. You probably can allow the clause in the first agreement, then push hard to have it deleted in the second contract. Keep in mind that, unless your first book was somewhat of a success, it’s doubtful you’ll get a second contract from that publisher anyway. You also might try to “cap” the cross-collateralization to a specific dollar amount, e.g., that no more than X amount can be setoff from any one contract.
  • If you are offered a multi-book deal, consider whether keeping the clause will leave you better or worse off versus signing individual deals. In other words, is the guarantee of publication from this publisher enough to outweigh the fact that one ordinary book may soak up the benefits of commercial success in another book? You might be better off selling to different publishers. You also might try putting time limits on the operation of the cross-collateralization clause: In other words, let the publisher cross-collateralize only after an eighteen month or two year period from the release of each book. This should at least prevent any amount being take out of an advance for the next book.
  • You could try limiting the cross-collateralization to specific editions of a book – i.e, only hardcovers can be cross-collateralized against other hardcover editions, not trade paperback.

The key, as always, is reading and understanding all of the clauses in your publishing agreements – even the ones that, at first glance, may seem innocuous.

© 2005 Daniel Steven