Equity financing of books

A rather uncharitable view of the book advances that legacy publishing houses give out to established (non first-time) authors is to look at it as “convertible debt”, as this piece by Matthew Yglesias points out.

An advance is bundled with a royalty agreement in which a majority of the sales revenue is allocated to someone other than the author of the book. In its role as venture capitalist, the publisher is effectively issuing what’s called convertible debt in corporate finance circles — a risky loan that becomes an ownership stake in the project if it succeeds.

Now, as I consider possibly self-publishing my book, while simultaneously attempting to sell it to established publishing houses, I realise that apart from the convertible debt, publishing a book also involves a massive sale of equity.

I’ve finished the manuscript, and edited it once. It needs further editing, but I’ve put it off so far in the hope that I can sell the book to a mainstream publisher, who will then take care of the publishing. However, given that I might end up self-publishing, and from what I read that publishers don’t do a great job of editing anyway, I might need another pass or two.

And then there are other things to be done before the book comes out in print – a cover needs to be designed, illustrations need to be put in, maybe we should get someone to do an audiobook, and all such. Now, if a mainstream publisher picks up the book, I’d expect them to take care of these. Else I’ll need to spend to get people to do these things for me.

When people first told me that royalties in book publishing are of the order of 7.5% of cover price, it was a little hard to believe. However, looking at the costs involved in the publishing process, it’s not hard to see why publishers take the cut that they take. The problem, though, is that it involves you selling equity in your book.

By going for a mainstream publisher (rather than self-publishing), you are saving yourself the upfront cost of getting your book edited, designed and “typeset”, in exchange for a large portion of the equity of the book.

Looking at it in another way, you are trading in your limited downside (what you spend in designing, printing, etc.) for what might be a massively unlimited upside (in case my book is a runaway success). For the most part, considering that most books don’t do that well, it isn’t a very bad deal. However, considering that downside is limited (in terms of costs) I wonder if it makes sense to trade it in for a large stake of what could be a large upside.

In any case, the main reason I’m still pushing to get mainstream publishers is because the self-publishing market is a “market for lemons“. With barrier to entry not being too high, lots of bad books are self-published, and so anyone who thinks they’ve written a half decent book will try to find a mainstream publisher. And this further diminishes the average quality of self-published books. And further dissuades people like me from self-publishing!


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