Making an indie with friends: Legal considerations

Question

I am close to finishing a game I am making with 3 friends. 1 other coder, and 2 graphic designers. We agreed from the start to split revenue (40/40/10/10).

However we have no contract, and I know that I don't own the graphics/sounds in my game just because "my friend made it". What steps should we take to make sure that all graphics/sounds that were provided by my friends, are actually owned by me (the company).

We have a budget of $0 so hiring a lawyer is not an option, should we draft our own contract regarding the revenue share?

Answer 1

Verbal agreements are usually considered valid contracts. But there is an old saying among lawyers:

A verbal contract isn’t worth the paper it’s written on.

The problem with verbal contracts is that when push comes to shove and someone goes to court, you have a word-against-word situation where everyone can claim that you agreed on something different and nobody can prove what you really agreed on. That's why it is usually a good idea to write your agreement down.

A few of the things you need to agree on:

• How do you split revenue?
• How do you split costs? And yes, if you want to promote your game, you will have to invest a bit of money sooner or later, even if it is just the subscription fee for the distribution platform.
• How much work is each of you expected to invest into the game in the future?
• Who owns what copyright? Keep in mind that you don't necessarily need to transfer copyright. You can agree to grant a non-exclusive perpetual license for using the work in the game.
• Who owns the trademark? Or in other words, if you decide to part ways, which one of you has the right to create a sequel?
• Games are never finished, just abandoned. What if some of you want to invest more work into the game to make it even more successful, but others don't feel like contributing anymore? Does that affect your revenue splitting agreement in any way?
• How do you make creative decisions about the game? When you come to a disagreement about a major mechanic, narrative or aesthetic aspect of the game, how do you resolve that conflict?
• How do you make business decisions about the game? Like where and when to release it, how to promote it, if you sell it to a publisher, to recruit more people, etc.
• What do you do if you decide to recruit more people for further development of the project? Do they also get a share (which would reduce the share of the others)? Or do they get paid a fixed amount?
• What happens when one of you wants out?
• What happens when two of you want the third person out?
• ...and a couple hundred more things I am not thinking about right now...

A lawyer's contribution is not required for a contract to be valid. But getting a lawyer to write that contract with you might still be a good idea. Legal writing requires a lot of attention to detail. It is easy to write something into a contract which doesn't actually mean what you all think it means. When you get into an argument and one of you decides to sue the others, the contract will be interpreted as written, not as what you thought it meant.

Answer 2

This response only addresses the revenue share aspect of the question.

I have found Back of a Napkin useful in the past. The (free) website is sponsored by a New Zealand law firm and steps you through five questions:

1. Who is in your team?
2. What are you building?
3. If your project makes money, what percentage stake do you each take home?
4. How will you make decisions?
5. What happens to the project if you break up?

You end up with a lightweight written agreement, which can be signed by the various team members. It is super-minimal as far as contracts go, but might work in the early stages of your company.

Answer 3

I think you should take a look at vesting.

It protects the other founders in case one (or more) of the founders isn't working as hard to achieve their goals on the project. It does that by not giving everything upfront, so you decide the milestones each one of you will have to achieve and when you achieve them, you get some of the shares you're entitled, so for example, you'll work your way to your 40%.

Let's say your first milestone is to deliver the first beta (extreme simplification here), and you agree that it will get you 1% of your shares. If one of you walk away before a certain period (this is defined by the founding team), say 2 years, then you get nothing. This stimulates everyone to dedicate to the project.

If you don't do this, someone could leave after one month and get their full share, while the other founders will have to keep working and this person who left will get the fruits of all your effort without doing a thing.

What is founder vesting? Vesting means that at the very beginning each founder gets his or her full package of stocks at once to avoid getting taxed for capital gains; but, the company has the right to purchase a percentage of the founder’s equity in case he or she walks away. [...]

In essence, vesting protects founders from each other and aligns incentives so everybody focuses towards a common goal: building a successful company.

This was in the first link I found when googling vesting for startups.

This article says:

Note: The legal aspect of vesting varies significantly from country to country. So, contacting a lawyer to make a consultation is generally a good idea.

I'm not giving any legal advice. In my country you don't need a lawyer to do that. I think it's good if you structure a written agreement based on vesting, just check your local laws.

Answer 4

First, IANAL

With that out of the way I suggest that you create an entity. In the US a LLC would do. Then give all the assets (code, graphics, etc) to that entity. That way, no one can claim that the "duck model is theirs" and that you have to remove it from the game at some later date. Same with IP issues. If someone sues your LLC because your duck-crossing-the-road game is too much like theirs, the LLC is at risk, and not the one person that make the duck in blender.

With your assets in the LLC you just need a simple letter/contract of intent.

Gross Revenue will be split with 40% going to Joe, 40% going to Jane, 10% going to Jack and 10% going to Bill. Liabilities will be shared in the same manor. If a time comes that investments need to be made, investments will be made at the same percentages. All works will belong to LLC Name Here. If any members of the group wish to stop participating in LLC Name Here, they will no longer receive revenues.

That should do what you want and offer "pretty good" protection. Keep in mind, that at some point you will want to hire a lawyer and accountant to help with these matters. But this should cover you for the short term.

You want to make sure you list your splits, the people involved, what happens if one of them wants out, and who is going to pay the bills.

Answer 5

The key thing is to get a written agreement of what everybody is expected to get out of the project and what they are required to contribute. This should also consider what happens if things go either better or worse than expected.

this does not necessarily have to be written in legalese, indeed the simple process of writing down how each person sees the project working may forestall any problems in the future. Often dispute happen not because any individual is being unreasonable but because peopel had different expectations and simply didn't realise that other people had made different assumptions.

Really important things to cover are :

• who owns the rights to copyright work produced by individuals ? Does it belong to the company or is it licenced to the game ? What happens of one copyright owner pulls out ?
• How are expenses paid for and how are profits distributed ? How is 'profit' defined ? Do you need to keep a pool of cash to cover ongoing expenses ? When can individuals take out their share of the value of the business in cash ?
• Who is responsible for any debts or liabilities ?
• How are creative and business decisions made ? How is the final decision made if there is a dispute ?
• How will you manage your accounts ? How do you verify that revenues and expenses are legitimate ?

As I have said simply having this sort of discussion and writing down what you decide is a lot better than nothing. Try to anticipate what potential problems and disagreements you might have and plan for them.

For example what happens if one of your team meets someone and decides to get married and move to the other side of the country ?