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I am a first time author looking to publish a children's book which I need to have illustrated.
I have a contract offer from a well-known vanity publisher, and they have offered to produce the illustrations. The contract states that they will own the copyright to the illustrations.
Is this something that should be a cause for concern, and does anyone have any experience in this matter?
You should be cautious about any dealings with a vanity publisher, they make all their profit by selling you overpriced services. In this case, you're essentially paying for the illustrations (perhaps not as a separate line item, but included in your contract), with no guarantee of quality, and no ownership of the finished images. It's even possible they may not create custom images for you, but draw from a library of stock images (which might be one reason they want to retain copyright).
You might want to look into submitting to a standard publisher. They usually prefer to find the illustrator themselves, so it is perfectly fine (and probably even better) to submit without illustrations included. You still end up not owning the illustrations, but at their cost, not yours. Also, they are likely to be able to afford/access much higher quality illustrations, as well as work with illustrators proven to have a good grasp of the market. Since they make their money off sales, not you, it is in their own interest to get the best possible illustrations, in a way that is not also true for the vanity press.
If you do want to self-publish, I would strongly advise commissioning your own illustrator. That way you get editorial oversight AND copyright. In general, if you're willing to do the legwork and research to find competent work, you can take care of all the services a vanity press does --not always at a lower cost, but with higher quality and more long-term control over the results.
I disagree somewhat with the rest of the answers. It's not uncommon for illustrators to seek copyright control over their work product.
There should be an agreement which specifies the royalties and duration of the collaboration and conditions of termination. It should also be stated whether the illustration can be used for digital publishing. (If digital publishing, then you need to be really clear about termination rights).
As long as you are not turning over exclusive use of your writing as a condition of publishing, you should be all right. On the other hand, if the publisher offers an advance or significant percent of royalties, I can envision an agreement where you do provide limited copyright transfer to the publishing house.
Everything is negotiable, and the main thing to keep in mind is that if you must give up something, you must gain something in return. If they are giving a "Take it or leave it" contract and giving you next to nothing, that is not really in your long term interests.
As a marketplace the web has no equal. Artists punt their services and provide gallery samples to entice and inspire. Fair and honourable agreements work for everyone. Find the work that flicks your switch and develop a sound working relationship with the artist.
https://www.freelancer.com/find/Illustration?gclid=COf1nv3eqNMCFQ08GwodnmIGKw
Worst case scenario: You want to publish your book somewhere else. In that case you can not do that with those illustrations, unless the old publisher agrees (which they likely won't do, at least not for free).
