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Donovan was recording for Pye Records when he was working on this. Pye also had Mickie Most (producer) under contract, but he moved to CBS before the album could be released. This prompted a lawsuit that delayed release of the album, so it didn't come out in the US until September 1966, and wasn't released in the UK until 1967. This was unfortunate for Donovan, because this would have been considered much more innovative if it was released on schedule. This was Donovan's first collaboration with arranger, musician and jazz fan John Cameron, who developed a new sound for him. Cameron played the harpsichord on this recording.

Donovan first met his future wife, Linda Lawrence, in 1965 when she was recovering from a broken relationship with Rolling Stones founding member Brian Jones. The pair dated briefly, but not wanting the scrutiny and uncertainty of being a pop star's girlfriend all over again, Lawrence broke it off at the end of the year. Donovan responded with this song. "It's not a normal love song, the singer told Mojo magazine June 2011. "On the face of it, the song is about being with Linda again. But sunshine is a nickname for acid. The Superman is the person capable of entering higher states because it's not easy to go into the fourth dimension and see the matrix of the universe in which everything is connected.

Donovan was good friends with The Beatles, and they were both making very innovative and trippy music at the time. Donovan's producer Mickie Most told him not to play the Sunshine Superman album to Paul McCartney under any circumstances, because he knew McCartney would be tempted to do something similar. Donovan recalled to Uncut magazine: "My arse was being sued by Pye after Sunshine Superman (the album this song was on) so , my masterwork, sat on the shelves for seven months. If you date it, it was at least a year and a half before Sgt Pepper and I remember Mickie saying to me, 'Don't play it to McCartney' but of course everybody was sharing with everyone else and nicking from each other." "I played it to McCartney anyway," he continued. "But they were already there, anyway, and George Martin was doing something similar with The Beatles, working out arrangements from ideas they had in their heads. George Martin was The Beatles' guy and John Cameron was my guy and they both had an appreciation of jazz which was key." Originally, the "Sunshine Superman" single was subtitled "For John And Paul," a reference to Lennon and McCartney.

Jimmy Page played lead guitar on this and John Paul Jones played bass. Page was a session musician at the time.