[Music] hello and welcome to sharing in success how to compensate your team through Revenue sharing my name is Kellen voer I'm a video game lawyer with a practice focused on representing independent game studios and as part of this work I'm frequently called on to create Revenue sharing structures and what I've noticed throughout my time doing that is that there isn't a huge amount of understanding in the industry about different types of Revenue share structures that are available um and as well some key considerations that they should be taking into account when coming up with a revenue sharing structure so let's first start with what a revenue sharing structure is it's a legal agreement or it could be a corporate structure where each person gets a percentage of game profit so we're talking about each person who's involved in the in the development of a video game whether it's a coder or sound person uh gets a percentage of gain profits and you wonder you know what are what's the purpose of this what can it achieve I think it achieves two key purposes the first is that it incentivizes the development team by providing a chance to participate in the game success this is especially helpful if you're trying to recruit people to work on a game in a very competitive you know job market um by providing this additional Financial incentive where they could earn you theoretically astronomically more than a regular salary would be uh through a revenue share structure um I think it really allows you to to bring on key people uh with a lot of talent to work on your game so I think there's certainly an incentivization element here also though and I think this is really important for independent G Studios is that the revenue sharing structure helps decrease the Studio's Financial outlay by supplementing immediate compensation with the revenue share the reality is with a lot of our clients that they they don't have a huge amount of money to put into the development team so they need to come up with a way to pay people what their market rate is but um to do it in a different way than just straight cash and I think the revenue share obviously can come in and serve that purpose so if the studio can you know if the Studio's faced with someone who would like $50,000 which the studio maybe can't afford then maybe it's $25,000 cash uh with this 5% Revenue share on top so the revenue share can come in and supplement uh what the studio could otherwise not afford to pay so I think there is that that second benefit and as I noted earlier there's this chance of earning exponentially more through the revenue share than an increase in salary anyway so together I think there's Great Value in these two purposes of a revenue share structure this incentivization it can help with hiring um and and as well supplementing what the Studio's actual financial means are with uh with the revenue share portion so what are these Revenue sharing structures I consider there to be two common Revenue sharing structures but of course with an asterisk I am a lawyer so there's always a qualification I think creativity is the limit uh there's lots of per UT a possible of these structures but even though our clients love to come up with incredibly complex structures almost all the time Simplicity is of often easiest to create and understand and and plus cheapest usually a lawyer going to have to write a plan and so there's a cost component with the more complex structures anyway um but I think Simplicity is core here because you need to understand the plan and how it's administered but also people that are receiving it they are trying to incentivize through the plan need to understand it as well so I think that Simplicity is a really key guiding rule when you're coming up with any Revenue share structure so let's talk about the two core types the two common Revenue sharing structures the first of which is the revenue sharing agreement the second which is same kind of structure in the in the sense of you are Distributing Revenue but it's different in that it's Equity based Revenue share so we'll talk about each of these now in turn and hopefully you have a better understanding of what each involves so let's touch on the revenue share agreement this is a written agreement between the studio and each developer where the studio agrees to pay a percentage of gain profits to the developer and importantly it takes the form of a royalty and these grants can be on a one-on-one basis or they can be done in a different way but let's look at the one-on-one in the one-on-one basis it's going to be something along the lines of following commercial release the the company the studio will pay somebody me in this case a percentage of The Game net revenue now we'll talk a bit about what net revenue means um sorry we'll talk a bit about what n net revenue means uh in in a bit but know that it can be on a one-on-one basis or it could be as you saw on the slide I just skipped ahead to or can be based set on a set aside pool and what do I mean by that the pool is a percentage of The Game net revenue that's allocated among all the participants and if you visualize it this way you take a percentage of the game Revenue say 15% and that's your your hard cap that's the maximum amount of the game Revenue that's being given away distributed under the revenue share and all the pool that's the 15% is participated in by whoever you want that worked on the game so you could have 2000 people in the pool and they would all be participating in that 15% so an example of of kind of pool language would be the company could allocate 15% of The Game's net revenue to the royalty so that's kind of pool type language so which one works you have a revenue share agreement that's more one-on-one and even a revenue share agreement that's a pool which one would you want to consider based on your particular Studio I think if you have a small Studio up to five people that one-on-one those individual grants I I think that works but it does not work once you get to uh to a larger team because you're going to lose track of the total percentage you're given away and when you're doing one-on-one grants you're not dealing with a hard fast you know pool cap of let's say 15% instead you're saying Kell gets five Julie gets 10 Etc and you it's often easy to lose track of how much you're actually giving away um and plus it just becomes unmanageable if you have 20 team members have 20 know separate agreements all trying to distribute 0.25 it works so much better in a pool context so if you have that medium or large team I think the pool's critical it's really the only structure at least as compared to the individual grant that really can help accommodate um you know multiple lots of people pardon me participating in that Revenue share and this Revenue share structure is usually the simplest but also the cheapest structure and as I noted it's really the most common so what is this this other structure the equity-based revenue sharing structure so you could do the agreement we talked about that a moment ago or you could do Equity based Revenue share and that means that the developers receive shares in a company and their shareholding percentage corresponds to their revenue share and instead of the revenue share being paid as a you know contractual royalty as we talked about in the case of the agreement it actually takes the form of a dividend on the shares and I think here it's important maybe to describe what a dividend is a dividend is a a distribution by the company uh on its shares it's a monetary distribution in most cases so the company could say that for all the common shareholders it's declaring a dividend of $1 per share which means if you hold a common share you get $1 that's multiplied by the number of shares that you actually have and a key rule with dividends and this plays out a bit later on in this presentation is that dividends must be the same for for shares of the same class so if you have a shares and B shares different classes of share you can say that the a shares get a dollar and the B shares get $2 dollar a share but you cannot say that within the a shareholders Kellen gets $1 a share and Julie gets $10 a share you have to treat all shareholders of the same class the same in most legal jurisdictions uh and that plays out in how you have to structure these Equity based Revenue shares because you don't want to give someone a revenue share for a game they didn't work on how do you split them up how do you give out separate royalties or differing Revenue shares uh to the different participants and what you have to do is create a separate share class for each game so in a simple example you could have common shares being owned by the found ERS and then game one shares will be owned by the game one devs game two shares by the game two devs Etc and we'll talk a bit about sequels and stuff later on and and DLC you can actually do subordinate you know series of game one shares series of game two shares Sky a limit as I talked a bit earlier on the permutations but what you can recognize so far here is that it's complex and and obviously it's going to be costly to create I think it serves a purpose though because it coexists nicely with raising investment in the game and I'm not talking about publisher investment that's that's never an equity based in uh investment just in advance I'm talking about Investors that actually want to share in your company I think it can coexist nicely with raising investment in the game because you could issue game one shares to people that invested in game one and those when you declare Reven a royalty a distribution pardon me a dividend on those game one shares the um the investors would share along with the other game one shareholders uh so I think it's a great structure in that sense but as you're Gathering here and as I noted it really is complex because you need to build into the company's constituting documents into its certificate of incorporation if you're in Delaware or it's articles if you're in some Canadian provinces all of this language that would actually normally be in a revenue share agreement how it's calculated how frequently it's paid all of that you have to calculate all of that but put all those calculations into these constituting documents and it could take the the form of more than one document that needs to be created internally within the company to achieve this um so obviously complex but I think it does serve that great purpose uh for investment and as I said it's rare I do these maybe 5% of the time so now up to this point we've talked about those those two purposes incentivization we've talked about as well supplementing what you could pay with your studio with the Rev share the two types of structure you can do the rev share agreement or you know it could be pulled oneon-one or you could do an equity based Revenue share one pays a royalty one pays a dividend but regardless of the structure I consider to be five key considerations you take into account when figuring out uh how to structure these Revenue shares relationships the first is the percentage of game Revenue to allocate and you know while I love to to try to see if there's standards in the industry I don't know if there's a standard in Industry on this I think someone needs to do a study I've done studies on publishing agreement rev shares but I've not done one yet on on game Revenue percentage to allocate in in a r share structure um so I I can't say that there's a hard and fast role this is what you should allocate but I think it's valuable to look at analogous structures and the one that comes to mind for me um is startup stock option plans I work a lot in the the startup sector as well and their stock option plans are used extensively to compensate employees almost in the same way and with the same purposes as I'm talking about for these uh these Revenue share agreements and in a stock option plan for a typical startup there is actually a a pretty common size and that's 15 to 20% of the company shares are allocated to employee compensation uh and and what I mean by that is the startup will take 20% of its shares set them aside and distribute that 20% among all the employees um and an option just for anyone's reference it's a right to buy a share in the future um and the idea here is if the company sells everyone's going to hopefully make a lot of money from their startup uh and from the shares that they receive through those options so it definitely serves the same purposes here but I don't want you to say okay we'll startups do 15% I'm going to do 15% because that doesn't make sense it's not an arbitrary determination and it's actually not an arbitrary determination for startups either that 15 number is usually just a good starting reference point and you don't have to follow it as a hard and fast Rule and I think there's a couple things that you should take into account when determining how much of the company's revenue is being given away under this rev share structure and startups consider the same two things when uh considering the option plan size and that's the number of people the company plans to hire as well as the percentage that the company is willing to give away the number of people you plan to hire is really going to play into that because you know if you're going to hire five people versus a 100 people or 20 people that you're all going to give a REV share to um you know that's going to factor into how big of a of a pool you actually need and as well just the percentage you're willing to give away ultimately you know 15% could be too much money in your mind based upon how you think the game is or is not going to perform and I think when you're considering that percentage that you're willing to give away under the Rev share you should also not forget the publisher gets a percentage now this presumes you're going to have a publisher who gives you an advance for the game development in exchange for getting uh you know percentage of the game's Revenue but when deciding on that percentage you need to take into account what the publisher is ultimately going to get uh usually if you have a industry standard based off my studies look at my GDC presentation last year on this it's about you 56% roughly maybe 60% of game revenue is going to be paid by the publisher to the developer so a 15% pool on a 50% rev share uh paid to the developer is much different than a 15% pool where 85% of the publishing agreement uh revenues being paid to the developer so who else is getting a cut outside of the the pool the Rev share agreements is really critical when determining that percentage and and I know I'm using the word rev share agreements here but I'm really talking about these Revenue share structures so all of these things also apply to the the equity based Revenue sharing as well so what you're Gathering is that there really is no guaranteed formula to determine the percentage but take into account both maybe start from a 15% number and work backwards considering the number of people you're planning on hiring and then the percentage you're willing to give away and and I think it's part of those two considerations as well though you've got to Circle back to that incentivization purpose and to the compensation purpose because if you just can't afford to give a you know to pay people what their market rate is you're going to have to have a bigger rev share than than not because you're going to to be give compensating more through the revshare component then through the cash component so let's move to the second key consideration and that's how you actually calculate the revenue share and you've seen some of this language before this net revenue number I used or term pardon me uh and the gross revenue term what do these things mean how do they play out so let's look at gross revenue um this in my mind is all revenue from the game there's no subtraction for expenses and I consider this to be dangerous because there actually is a risk that you won't have the funds to pay in theory there's a chance that your expenses could exceed the amount of money you have coming in especially if your game's not that successful uh such that you're going to have an obligation to pay a REV share based on gross revenue but in reality that money does not exist in the company's bank account so almost always I believe the calculation should be based on net revenue and net revenue I consider to be game gross revenue all the money coming in from the game that you get minus platform fees returns chargebacks publisher payment taxes ultimately it's a company that gets ass set the cost deducted from gross revenue to arrive at the net Revenue so for each of our clients we do completely different structures as to what's deductible and what's not I feel like it is a bit of a collaboration as well with your team members especially if you're a close-knit team as to what is going to be deducted salaries for example may not be something you would deduct when arriving at that net revenue number but I think it is really critical to say that it's a net revenue calculation and as for the terminology Net versus gross I don't really care what you call it I think it's just really important to say that there are going to be it's a term whether you use profits um or other terms as well as long as it's clear there are going to be some subtractions that are going to be made before you arrive at that number from which you calculate the Rev share so the third consideration is how this Revenue share is actually earned and we can talk a bit about as well when is it paid but how is it earned and there's common approaches here too and the most one of the common ones is time based someone's time spent on the game is divided by everyone's time spent on the game and then you arrive at a percentage from that calculation what it requires though is timekeeping and while lawyers like billing by the hour at times it does not work in the independent game scene Indies hate timekeeping so I don't know if it works for everyone we certainly do see it I see it quite a bit I think it's a simple way of doing things too but timekeeping may not work well perhaps it would work well though if you had a bunch of contractors that were track their time just because that's natural for contractor work um in that case maybe it would work okay a different approach other than time based is Milestone based where you grant a person a particular percentage but it's subject to completion of a milestone and what I mean by that is you're going to hire someone perhaps as a sound designer and you're going to offer them 5% of the game uh gross pardon me net revenue 5% a net and and they get that only upon completion of the Milestone you could do it pro-rated based upon completion but I think only earned upon completion makes a lot of sense especially for you know a deliverable like piece of sound that's going to be used uh in a game so that's Milestone based and I think that works really well from an accountability perspective because you can say to your team members look if you develop out this piece of code you're going to earn the Milestone and I think it works well when it's it isn't someone whose role is everywhere on the game I think it works really well if someone's just working on a portion of the game because I think if you're going to do it Project based um in the sense of you know develop a particular uh piece of code it can get a bit complex but uh another way of doing it too when we're talking about Milestones isn't perhaps a part of the project but it could be a stage of the project development so we could combine time based with um with Stone based and say that actually it's the development cycle Milestone so once we hit Alpha if you're still working with us we will give you 1% and if you're still with us at you know the Beta release steam Early Access whatever it is we'll give you another percentage and another percentage so you could combine time base with Milestone based as as a variant of the Milestone structure uh but the completion of the Milestone should be determined by the company acting reasonably you could also do the determination based upon the passage of time so you grant a person a particular percentage but it's earned over the development cycle so for an example you could offer someone 10% rev share which is vesting over 10 months and what vesting means it's a bit of a startup term vesting is a synonym for earn so someone gets 10% rev share but it's earned over 10 months they would earn 1% based upon a month of work and if they stop let's say halfway through let's say 10 months so they stop at five months they would get 5% because they've only worked half the duration so it's kind of a time based structure but it's not looking at them tracking time it's instead looking at just the passage of time and saying if you're staying with us for a particular period of time you're going to get a percentage of It kind of like tied into the Milestones as well you kind of see some overlap there but you can also introduce what's called a cliff in startup lands and what that means is you have to stay with the company for a particular period of time and only then do you start to earn the the revenue share percentage so if you say 10% vested over 10 months with a three-month Cliff the cliff is this C off point so if they stay only for two months they don't get anything they stay at three months then they'd get you know a third and then it would go on for the remaining maybe remainder uh maybe investing in monthly period so you can see here that there are multiple ways for that rev share to be earned just eping passage of time Milestones um you know and this vesting structure as well and I think though regardless of which you choose lean toward that Simplicity whatever works best for how your studio operates and how your team you your team feels comfortable too I think that's the way to go but at least you've got a couple options outlined to you here the fourth is how do we treat noname Revenue what do I mean by non-game Revenue I'm referring to downloadable content to merch to sequels how do we deal with that Within These Revenue share structures and to be honest some of the structures work uh in a way that can accommodate these things but I'll say that equity-based Revenue share has a lot of trouble dealing with um DLC and merge sequels we'll talk with that in a second so what do you do with these do we include them or do we exclude them from the revenue share on on a high level at a high level a simple rule is the developers should only be included in the royalty for merchandise for DLC only if they worked on that content but the tracking and calculations can get complicated quickly for for these um you know additional sources of revenue so let's start with DLC and merchandise I think it's important to treat each of these Revenue sources as a separate calculation so in the revenue share agreement you would say that you know the people that worked on the uh DLC and the people that worked on creating the merchandise they would have a separate Revenue calculation and would be paid Out Among those people um and you know that's kind of high level how you do it but it doesn't work well in an equity revenue sharing structure and this goes back to that dividend rule a bit complicated I know that described earlier because people are all going to have the same share class so you can't change the dividend that's going to be paid to those people of the same share class so it's hard to have secondary Revenue Source calculations if not impossible have secondary Revenue uh pardon me separate Revenue share calculations within shares of the same class there's there's a series way of doing it where you create a secondary class of share but super complicated so I think ultimately if that's something you're considering ing probably like most people lean toward a REV share agreement and what about sequels my rule is always create a new Revenue sharing agreement plan or you know share class for those sequels there's no point in using the same agreement because your percentages are going to vary the team's going to be different I don't think it makes sense the fifth and final set of considerations is what to think about concerning termination of the revenue share agreement because ultimately can't keep on paying the revenue share forever it's not practical even just from a monetary perspective because at some point the game is not going to be making the same kind of money it once did so paying $2 to somebody just doesn't make sense you could set the revenue share to be fixed duration you know for example five years pretty simple you're going to get paid this for a period of five years following commercial release you could also do it based upon a monetary cap so until $100,000 in royalties is distributed among all of the participants the best I think is actually mixed where you say it's until the earliest St five years or a certain percent not percentage a certain dollar figure in royalties are distributed so I think that's probably the best way to plan for termination and this duration and this monetary number they're just examples they're not anything to follow um and I think that's probably the best way to do it one thing to avoid though and one thing we are avoiding here with this language is to avoid a Perpetual term because you just can't have this going on as I said it's not practical to be looking at 20 years from now paying out some rev share so plan for termination because ultimately it may need to end let's talk about situations where it actually may need to end well if the company is bought or the game is bought then the the revenue shares should terminate we have had clients that sell their game and the acquirer doesn't want to deal with the revenue share they want to be able to monetize the game however they see fit without any baggage from the former studio so your Revenue share structures should accommodate um how it could be terminated should the company or the game be bought and perhaps a final payout uh is the way to go but there's a couple ways of doing it that just go beyond what we're talking about here you should also they plan for hard financial times sucks to say but that's something you have to do what if the company can't pay or or it's harmful to pay and by harmful to pay I mean the company could be in a tight Financial spot where paying that Revenue share could be detrimental and cause it to have you know not enough funds on hand to keep on paying its own payroll so there may need to be a clause built in there to address these situation no I don't think the company can't pay or it's harmful to pay I don't think they're often a cause for termination but the company should be able to delay payment until it's able to acting reasonably so I think in these agreements it's great to have a clause that says if it's harmful for the company to pay it would cause the company to go bankrupt if they pay that the company can delay that payment until acting reasonably it can make the payment and perhaps there's an interest component something like that to it but admittedly there is an element of trust involved in in this structure so I think it really requires a cohesive team and some trust there so to summarize I consider there to be two types of plan you should look into the Reven sharing agreement which could be an individual Grant or could be a pool or the equity-based revenue sharing 95% of the time I would say that the revenue share agreement is best and you should create a percentage uh royalty pool based on your hiring plan whether you're actually doing at the pool structure or you're just doing individual agreements you should be saying we're going to set aside a certain percentage and that's going to be uh you paid out among everyone who's participating I then consider how that percentage is vest is it hourly Milestone passage of time some hybrid these are all things you need to consider and then as well consider downloadable content merchandise how those are addressing the plans but split those sqls out to a new plan and then finally plan for termination is there an end dat is there a payout cap and consider that delayed payment Clause as well so that's it for the presentation my contact info is here and I'm glad to answer any questions thank you [Music]