A countless number of music artists struggle to fund the creation and promotion of their songs. For those that do, their ability exercise control over their work is limited by their dependence on record labels. BaseNote, founded by Michael Cieslak, Mick Wollman and Nic Dahlquist in February 2021, is a music investing smartphone application enabling fans to invest in their favorite artists, and thus allowing musicians to maintain creative control over their work.

BaseNote is currently bootstrapped. The startup’s only employees are the founders. BaseNote exists among a number of Web3 startups looking to address the challenges artists face in the Creator Economy.

Frederick Daso: How does the financing for artists traditionally work?

Michael Cieslak: Great question. Most successful artists get financing from a label they’re signed to, with the contract structure heavily favoring the label. In a typical label deal, the artist and their label agree to split the royalties for a set number of albums. The label then provides the artist funds in the form of an advance that the artist needs to pay back. From talking with artists, we find this structure results in four shortcomings: recoupment, fixed revenue share, lifetime contracts, and masters ownership.

Many artists have a revenue split somewhere around 70% for the label and 30% for the artist. And while that already favors the label, artists are frustrated that the recoupment only comes from the artists’ revenue share. This means that if the label spends 100k on the album, the album will need to gross ~330k before the advance is ‘recouped.’ Until the advance is recouped, the artist will not get another penny. As you can imagine, many artists feel that they should make money when the label makes money.

Existing contracts do not accommodate an artist exploding in popularity after releasing the project. With a fixed revenue share, the project will continue to pay the label 70% of revenue no matter how successful the project is. This is compounded by the fact that the label owns the work produced, which means they retain that 70% revenue share forever, no matter how many times the advance has been repaid. Since the label owns the work, this means the label also owns the masters, which prevents the artist from having control over how they are used.

With BaseNote, we are hyper-focused on replacing the existing model with a model where risk is spread out among many investors, enabling us to address these shortcomings directly. There is no recoupment because we offer a tiered revenue share model, which reduces the revenue share as investors are repaid. The tiered model removes much of the stress of ‘properly’ pricing how much an artist will be worth in the future, the contracts are for a fixed term, and the artist owns the masters.

Daso: Why is scouting and growing emerging music talent difficult for record labels in today’s data-driven streaming age?

Cieslak: Streaming has made it easier to actively scout talent, but it has also drastically increased the amount of new talent putting first demos out. Overall, it has been a net win for A&R efforts since they can use data to ‘alert’ on emerging talent.

However, I think breaking out, and growing talent has become increasingly difficult to control, especially with platforms like TikTok becoming the biggest drivers in music discovery. Before streaming, labels invested a ton into their distribution capabilities, allowing them to more easily get their artist heard by a large audience via the radio. Now, with algorithms constantly curating tailored playlists for each listener and viral moments driving trends, how effective the label’s distribution arms are is significantly impacted.

We see this driving tension between artists and their labels as artists want to focus on their art, but labels are eager to create a viral moment to drive a better return on their investment. For example, Halsey recently had a public feud with her label so that she could release ‘So Good’.

Ultimately, I think this will be a huge driving force for more and more artists seeking to be independent.

Daso: What are the missing incentives to motivate fans to support artists outside of normal fan-artist interactions?

Cieslak: After we decided to focus on financing, we interviewed many fans and artists to dig into this exact question! Those conversations are what led us to build BaseNote. For me, it is simple: Artists do not want and are not looking for handouts; they’re proud of the work they’re putting out and do not want to feel exploited by someone speculating on their future. This meant there wasn’t a product that was aligned with artists’ values where they could raise funds. On the fans’ side, a huge portion of them is aware that streaming doesn’t pay enough, and they want to support artists they love. Unfortunately, they can only see so many shows and buy so much merchandise, so they’ve been looking for a better way to support artists. We’ve found that for a ton of these fans, simply enabling them to share in the possible upside is enough for fans and artists to feel like they’re in this together.

Daso: How does ownership of music rights change with BaseNote investors being able to share in an artist’s streaming royalties?

Cieslak: Ownership of music rights has always been a fraught topic with artists, but as of late, the public has been made more aware of how painful this can be for an artist. Most notably, we have Taylor Swift re-releasing her prior studio albums to fight back against someone else purchasing her back catalog. When developing BaseNote the founding team wanted to ensure that we could use BaseNote to change the ownership model. We believe that because fans are looking to support artists and share in the upside, they’re not interested in controlling or owning the masters, which allows us to change the rights model completely. For funds raised through BaseNote, the issuer retains all master rights after the deal duration.

Daso: Does BaseNote essentially provide artists with a “rolling advance” with the way that the company structures the fan’s investment into the supported talent?

Cieslak: That’s a pretty good mental model for what we are doing. When an artist comes to us, we encourage them to think about the different phases of the project– so something along the lines of production, marketing, and touring. Fortunately, regulations allow us to close different rounds of funding to line up with the different phases of the project, so long term, I envision this will be more structured in the product.

We also understand that the timeline for raising funds via fans and production may not line up, so we offer artists advance so they can start production concurrently with their raise through BaseNote. This also acts as a flywheel for them to create media and excitement for their project while the offering is live. Eventually, we plan on providing way more guidance here to give artists more help on how much, when, and for what they should raise capital.

Daso: How does the relationship between record labels and artists change now that BaseNote exists? Where does the balance of power now lie?

Cieslak: I think it’s important to note that there are tons of independent labels and independent music professionals that provide services to artists, so it really depends on the size of the label we are talking about. For the smaller labels, I think it opens the door for them to sign and grow more artists as they can get fresh sources of capital to accelerate artists’ careers. For the larger labels, they will likely see this as another signal that they need to innovate on their business model in order to retain and attract talent. I think BaseNote, along with other innovations, will slowly shift the power from labels to artists, but in the near term, the labels still have moats keeping them in power.

Daso: How did meeting FINRA regulations shape BaseNote’s product design and system architecture?

Cieslak: When we first started out, we heard a lot of gripes from others about getting FINRA approval, so we were rather worried about how regulations would impact the product beyond what we could foresee. However, we were able to build the majority of the product how we wanted to after working with the team at FINRA to understand any feedback they had. From the product perspective, the onboarding experience and ranking of content are most impacted, but most of the impact is small enough that I don’t feel it is a burden to our product.

On the system architecture side, the payment and escrow flows are heavily shaped by regulations. But outside of that, there hasn’t been much of an impact. Overall, we appreciate FINRA’s guidance, which ultimately serves to protect our investors.

Daso: Within BaseNote’s long-term vision, could the startup take the form of a decentralized infrastructure for the Creator Economy?

Cieslak: Definitely. I view the long term as BaseNote really being the hub for how creatives meet their needs. Today that is through financing, but long term, we want an artists to be able to come to us to meet any of their needs. I would love to see us grow and expand to create an ecosystem of service providers and artists who work together to be successful. I see several strategic advantages here, which are to build a system of trusted partners for creatives, allow creatives to get comprehensive support that fits their style or a project’s style and provide a hub for collaboration between creatives.

Written by Xodas.