I have a question for anybody knowledgeable in this area - If you sell a short story to a magazine or even get it published in WOTF, but later turn that story into a novel (or even the first chapter of a novel), then what are the first publisher's rights regarding that story and the subsequent novel?
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From my understanding of copyright, when you sell a short story to a magazine you are selling only first serial rights for that particular story and for a particular location. In other words, you sell your right to publish a specific work in a specific market. You are not selling your entire bundle of rights under your copyright.
Copyright is a set of rights which include - right to make copies, authorize others to make copies, make derivative works, sell and market the work, performances, etc.
When you sell your story to a magazine, read the contract, and don't sign away all of your rights to your story. Since you are only authorizing "others to make copies" you still retain the right to make "derivative works" i.e. a novel or movie.
Real life example: Ender's Game was originally published as a short story and OSC later made it into a novel.
[This message has been edited by redux (edited October 28, 2010).]
It entirely depends what is in their contract. If they have reprint rights in perpetuity, for example, they can reprint that story as, how and when they like and you can't do anything about it. If they have EXCLUSIVE reprint rights in perpetuity, you would need to negotiate if the short story is verbatim (or close to it) part of a novel.
Exclusive rights in perpetuity, however, are quite rare (a lot fo authors simply won't sign such a contract no matter the money being offered).
It would be wise, when shopping the novel around, to be quite upfront about the fact that it includes/is based on a published story. There are instances where this would be a selling point, if the original sale was prestigious enough or read widely enough.
Essentially, if you are only selling first rights to a short story you as the author are still free to create a novel from that short story and sell it to a different publisher. But, like tchernabyelo mentioned, placing that short story verbatim into the novel might prove problematic.