Once you have determined that you have been presented with material and a team in which you'd consider investing, it is time to get down to the brass tacks - what is the deal that is being offered? Does it make sense? Does the potential upside justify the risk you are being asked to take? How can the deal be improved?
It is important to remember that your primary goal in film investing is to manage risk. We certainly want deals that give us the opportunity to make a lot of money, but do not be tricked into focusing on the potential returns. The producers will likely present you with a list of films that they claim are just like their movie and which made a lot of money. They will present that as the reason you should invest, but for the most part this argument is completely irrelevant. The success of those films offers no real indication that this film will have the same success.
Instead, you should look at the deal and ask what happens if things go badly. In a sense, you are asking not only about their plan for the film but also their Plan B - the back-up plan. What steps are they taking to mitigate the negative impact of the unexpected? Obviously they will have production insurance to cover casualties and calamities (if they don't, you should run away as quickly as possible), but you also have to look at whether there is a completion bond, whether they have any traction for potential distribution of the film once it is completed, whether they will have the cooperation of the stars in promoting the film. What is the distribution plan for the film and is it realistic, and perhaps more important, what could cause that plan to fail and what will they do if it does?
The other extremely important part of looking at Plan B is to consider the actual form of investment that is being offered to you. Are you getting a security interest in the film to protect your investment? Where do you sit in the priority of payouts - the so-called "waterfall?" Who is in front of you in the waterfall and how much are they getting back before you get your money? If you are being asked to assume a higher degree of risk, does your ultimate return in the event of success exceed that of lower-risk financiers, and by how much? Is it fair? More important, is it a risk-reward profile that you are willing to accept, or would you rather lower your risk in exchange for giving up some of your potential returns?
The only way this can be answered is with a realistic projection of how funds will be distributed under various scenarios ranging from worst case to likely case to best case. Frankly, most producers are not competent at creating these projections, and they have a built-in motivation to be more optimistic than what may be warranted. In order to prepare a projection of various scenarios with any degree of accuracy, there must be a fairly detailed understanding of the distribution process, collection accounts, residuals, and contracts. This requires a lot of experience and most of the people in the independent film space simply do not have that level of knowledge (although certainly many of them do).
So, if you are investing any amount of money that is a serious investment for you, you need to talk to other people with industry experience and get their take on the project. You should also get professional help from someone who has real experience with these types of investments and knowledge of the current market. As with any investment, knowledge is your friend and independent analysis of the claims being made is critical.
I'll continue with a discussion of various specific deal structures in the next installment.