Archive for November 2008

Publisher Developer Deals and the Buyout Provision

 Tom Buscaglia's recent article on Gamasutra discussed some very important points that game developers should take to the table when negotiating a deal. He also pointed out a new contract model that caught my interest.

    "I recently ran into a really clever ploy by publishers. In order to overcome the objection to IP assignment for original IP games, instead of demanding the IP ownership in the deal, publishers are     now allowing the developers to retain IP ownership until after the game is released. However, the publisher retains an option to buy out the IP (and in the process the developer's rights to a back-    end royalty in the process) if the game performs above a certain level. What level, you ask? Well, it is inevitably some time before the advance recoup point when back-end royalties would normally     kick in if the game is a hit! You really have to admire their guile. If the game sucks, the developer can keep the IP. But if the game is a hit, the publisher owns it and the developer gets screwed out     of any back-end royalties in the process!"

     Tom pointed this out as an example of the ways in which publishers attempt to exploit game developers, and there is no question that this particular model can be seriously abused by publishers. However, Tom's primary point was the developer's need to carefully negotiate and think through the process of deal making. With that being said, this raises the question of whether, by way of negotiation and valuation, the buyout model could ever potentially benefit the game developer.

    The Potential Benefits of a Buyout Provision

    Obviously, there are times when a buyout provision is a very bad idea. If a developer agrees to a $1,000,000 buyout once the game reaches a sales threshold that indicates a blockbuster, the deal isn't benefiting the developer at all. However, if the buyout provision takes into consideration the actual and future value of the product if that product reaches a certain sales milestone, the deal could be a very good one for the developer if the developer otherwise wouldn't see a royalty off of Net revenue (which is very often the case). It is possible for the game to be successful while the developer only barely breaks even. With ever escalating development costs and the tricky structure of Net revenue, not to mention a short publishing cycle (in most cases only 3 years), it's rare for developers to ever see anything after the advance.

    I covered royalties previously, so by now it should be clear that royalties aren't ever a guarantee. If a game costs $10,000,000 to make, the game is selling for $40, and the developer is taking 15% of Net after recoupment (which discounts cost of production, third party distributions, reserves, etc.), the game will have to sell almost two million copies before the developer would see a dime ($40 * 2,000,000 = $80,000,000 * .10 [approximate and probably highly underestimated deductions from gross] = $8,000,000. $80,000,000 – $8,000,000 = $72,000,000 * .15 = $10,800,000). Two million copies is a very respectable number as far as games sales, and most games never do that well. If you get a buyout provision that is triggered at 1 million sales, and the game never sells more than 1.5 million, under the above formula a buyout provision for $10,000,000 to the game developer would be a substantial windfall.

    These are hypothetical numbers, but it demonstrates the point—it isn't necessarily the deal model that is bad, but (as Tom pointed out) how the deal is negotiated that determines the deal's worth. The difference between a royalty rate and a buyout provision is the difference between purchasing shares in a mutual fund and betting at the race track. With a royalty rate, there's a fixed rate of return for as long as the game is published that is based on the game's success in the market. With a buyout provision, you are playing the odds and betting that your game will be a winner. Investing in a mutual fund is responsible, but it doesn't always guarantee a return (look at the current market). A buyout provision doesn't guarantee a return either, unless your game is a success—however, if the game's a success yo may stand to earn substantially more than you would earn under a traditional net royalty formula if your valuation is higher than actual sales. You are betting on those odds, you want to bet high, and you want to negotiate the highest number you can get.

    Valuation under the Buyout Clause

    The key to a fair buyout provision comes down to valuation. It also comes down to the questions you need to ask yourself when contemplating a deal:

  • How do you determine the game's value once it's achieved a certain level of success? How high can you push past the sales milestone to determine the game's worth?
  • What is being sold?
  • How do you come up with a number?
  • Should you rely on the amount the developer would have earned by the end of the publishing cycle?
  • Should you rely on the game's net worth to the publisher?
Ideally you want to anticipate the best possible outcome—so your projections should include all sales on any current and future consoles, any possible derivative uses that could lead to future income for the IP owner (i.e., film rights), and the inevitable likelihood of sequels. Other things to keep in mind as the developer are ancillary rights (merchandising), right of first refusal for sequels, OEM and bundling rights, and buy back provisions should the publisher choose to not exploit the work.

Any deal can hurt the developer if the developer devalues their own
work. The key is having faith in what you create and allowing that
confidence, good sense, and perseverance (as well as a good lawyer)
guide you through the negotiation process.

 

Once again, thanks to Patrick Sweeney for his valuable input.    

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Collaboration Agreements and Online Development Teams

    Online collaborations are a frequent occurrence in the independent game development community. However, the legalities surrounding this kind of team building raises a variety of questions. Problems like privacy, jurisdictional issues, and age all make these relationships potentially problematic. I'll cover some of the major issues below.

    What to Put in the Contract

    You've found a few people online that you want to work with. You want to make a game that each of you can use in your respective portfolios, and maybe you hope to get some kind of profit out of the deal. However, none of you have met in person. How can you make sure that your interests are protected? You sign a contract, of course! The agreement may be a collaboration agreement or a work-for-hire agreement depending on the project.

    Apart from standard contract terms (term, identification of project, substantive duties of each party, compensation, etc.) the contract should include:

    1. Identification of the Parties: Once you've decided to enter into a legal and potentially for profit agreement, be wary of anyone who wants to maintain anonymity. If anonymity is an issue, include a confidentiality provision in the agreement. However, it is important that the actual name and address of the parties be clearly stated in the agreement. Some Courts may not enforce agreements if pseudonyms or non-entities are used as opposed to real names, so it's important to state the legal names of the parties.

    2. Distribution of Rights: Depending on the type of project, the people involved, and the leverage of the individuals, rights distribution can be problematic. Simply put, there is no hard and fast rule to how rights should be distributed. If the project is not for profit, individuals may want to retain their rights to the project—under Copyright Law, each major contributor is automatically a joint author and co-owner in the work, so unless you get an agreement stating otherwise you won't be able to do much with the work without the permission of the other contributors. In a collaboration agreement, this can be handled in a multitude of ways:

        a. Assignment: The contributors may assign their rights to a single individual or company in exchange for a royalty, credit, or some other for-value consideration. This may streamline the process of exploiting the work, but it also puts all of the power in the hands of one person or entity. In virtual collaborations, the credibility of that entity or individual may be suspect. If you are assigning your rights in this kind of agreement, it is important to carefully research the people you're working with and to obtain references. If the person is unwilling to provide references or some other means of verification, you should be unwilling to assign your rights.

        b. Power of Attorney: Another method of streamlining exploitation is to allow individuals to retain their rights, but to allow one individual or entity to have power of attorney to enter into agreements on behalf of the rest of the contributors with regard to the work. The individual could be the lead contributor or even a third-party trustee. In this kind of agreement, full disclosure should be required—this means that the person acting with power of attorney should be required to open all books to the other contributors to ensure fair and accurate disclosure of all agreements, licensing efforts, revenue and expenditures. The agreement should also state that the individual with power of attorney owes a fiduciary duty to the other contributors.

        c. Work-for-Hire: The contract may be nothing more than a work-for-hire agreement. In that case, it is important to be very clear about how you're going to be compensated. You also want to ensure that you receive credit for your contribution and permission to personally exploit the work in your own portfolio. Non-compete clauses are often included in work-for-hire agreements. However, these provisions are problematic in online collaborations due to the lack of geographic boundaries. Geographic limitations to non-compete clauses should be clearly stated, or the clauses should be avoided all together.

    3. Jurisdiction, Venue, and Choice of Law: Jurisdiction, Venue and Choice of Law determine where and under what laws the contract is enforceable. If you're the person in charge of the project, you obviously want the jurisdiction and choice of law to be convenient to you—jurisdiction should be your state and country, venue should be the state court closest to you, and choice of law should be the law most favorable to you, provided that the choice doesn't contradict your jurisdiction's choice-of-law rules.

    Any time you decide to make things legal and binding via a contract, it's worth the time and investment to have the contract drafted or at the very least reviewed by a competent attorney.

    How to Enforce the Contract

    Each collaborator must sign the agreement. This can be done in a few ways, and some jurisdictions have specific rules concerning contract enforceability. Be sure that the contract includes a provision stating that photocopies made at time of execution are original agreements, and check your local rules to ensure your chosen method is enforceable.

    1. Snail Mail—send a signed copy of the agreement to each party requesting their signature, and include a return, pre-paid envelope. Once you receive their signed copy, make additional copies of the signed copies and return one signed copy to the collaborator for their own files.

    2. Fax—send a signed copy of the agreement to each party requesting their signature via fax. Have them fax back the signed copy.

    3. Electronic Signatures—This is tricky, as not all jurisdictions recognize electronic signatures as enforceable. An electronic signature may require a unique identifier along with the person's name to ensure the identity of the individual. For instance, a date of birth or the last four digits of a social security number, or any other means that can be used to prove identity, may be necessary.

    Once the agreement is signed, the agreement can be enforced under the terms of the Jurisdiction, Venue, and Choice of Law provisions of the Agreement.

    Other Issues

    1. Age: In the U.S. and in many other countries, contracts against minors (under 18) are unenforceable. This means that if a minor signs a contract and doesn't perform, there isn't much you can do against that individual.

    2. Local Rules: IP rights, causes of action, and court rules vary from state to state, country to country. One example is droit morale. Moral Rights, while typically ignored under U.S. law, are an issue in many European nations. If those issues aren't addressed in your contract, a contributor from another country may attempt to assert rights that are not included in the agreement, thereby avoiding the jurisdiction and choice of law provisions of the contract. It is therefore important to understand what causes of action a contributor may try to assert against you in their home territory.

    3. Veracity, Reliability, and Credibility: The Internet exposes you to a wide variety of people, many of whom have loose ethical standards with regard to business relationships. It is sometimes difficult to ensure that the people you're working with are reliable, truthful, and credible. Getting references and prior work history is mandatory if this is a venture where your property or money is at stake. Even with the appropriate research, it is important to tread carefully.

    4. Language barriers: It is important that you understand what you're agreeing to. Be sure that nothing is being lost in translation. Make sure your agreement is written in clear English (or your native tongue), and try to ensure that everyone is on the same page as far as definitions and general understanding.