Make It Big In Games - Latest Comments in One Way To Divide Your Company Equity At Start Up

Re: One Way To Divide Your Company Equity At Start Up

Quadsomy21 — Wed, 08 Apr 2009 02:36:14 -0000

Hi Jeff,

Just did the company divide, and the next step (in some cases / my case) is the stock value price for investors... hence, thought folks here might have that followup. Seems maybe no...

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Tue, 07 Apr 2009 22:05:02 -0000

This article is about how to divide ownership of your company, not your product. Those are two very distinct and different issues. Usually, the company owns the copyright on the projects that it funds and develops.

Re: One Way To Divide Your Company Equity At Start Up

Tathar — Tue, 07 Apr 2009 18:37:00 -0000

I actually have to disagree with a lot of this. Unless you really want everyone but you (unless you're doing more than design, and you still don't own everything) to have copyright interest in part of the company's games (I can't imagine that you would) you need to have at least a contract that says it's "work for hire" for independent contractors, or have everyone as employees with all of the taxes and expenses as a result.

I'm no lawyer myself, but I'd much rather have that piece of paper to prove I hold copyright over my team's work in case I need to use those copyright protections for any reason. Since you can get registered copyright in the US for $35 now if you do it online, it's very inexpensive to get some very good benefits, including having your attorney's fees paid for you if you win a lawsuit over your registered copyright. However, you have to actually own the copyright to whatever you're registering. I don't know much about the validity of their contracts, but LegalZoom offers a lot of relevant contracts about these things for $15 or very close to it.

Re: One Way To Divide Your Company Equity At Start Up

Quadsomy21 — Mon, 06 Apr 2009 12:46:57 -0000

Hi Jeff,

Thanks for the response.

We are a developer. By modest sales projections, do you mean high or low? Sure, anyone can say it, but by even the shrewdest of assessments for this type of game and development team, 300k is comically low. I suppose we could be even more generous and valuate for 150k units sold? Keep in mind, I have done products for PS2 with both critical acclaim and commercial success (awards / over 1M units sold) so I'm not just tossing notions in to the air here.

I have seen too many good studios ruined by publishers, given that the publishers are the only ones holding the purse strings. I much prefer a model like High Voltage, where the developer can retain their IP and drive a solid deal with the publisher. Further, would like to make a proper game to match the new landscape of gaming, but where the publisher is much slower (and more cautious) and is only willing to put down a low amount to make a quality title (under-fund the project and hope for the best) with "risky" innovation.

Investors will be paid back through royalties. The risk will be made quite clear up front (you could loose it all!). IMV, "independent" means not wholly reliant on game publishers, and where I retain 51% ownership.

Imagine all the studios and products that we know and love, that would NOT exist, had they all depended solely on movie studios and game publishers... As you know, the risk is part of what drives early stage investors, as the rewards tend to be higher, if achieved.

--
Happy to talk further on this, but would love to hear thoughts on valuation.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Sat, 04 Apr 2009 16:17:51 -0000

Are you a publisher or a developer? A 300K units sales projection is very, very far from modest. I am not a fan of taking investor money for starting a development company. How are you planning on paying your investors back? If you are going to take investor many, why not just sign with a publisher? They understand the risks. Most investors do not. If you take investor money, you no longer own your company, so you are not really Indie. You owe it to the investors to pay back the money at a great return since this is such a risky business. I simply do not think anybody in this business can make those kinds of promises.

Re: One Way To Divide Your Company Equity At Start Up

Quadsomy21 — Sat, 04 Apr 2009 14:22:01 -0000

Have questions for y'all about valuating the company for first round investors considering a 4 year period, given that the studio has only been running for a few months (team with individual track records but un-proven as a new group with a new IP):

1. Value the team at a low-ball 100k a head?
2. Value the Company at $1M for the name and contacts?
3. Value the IP at a cumulative, expected publisher net (since we would own the IP), with a modest 300k sales projection for the first title, followed by a modest 400k sales projection for following titles on same IP? Or, better to value at Gross? Not cumulative, rather last sale? ??

Thoughts?

Thanks,

Dan

Re: One Way To Divide Your Company Equity At Start Up

Joe — Fri, 27 Feb 2009 13:46:42 -0000

Approached by some people who told me an idea and wanted me to create a formula for this idea, in exchange for equity in a company that is about to start up. Now the only product that we would have is the one that I’m creating. But I don’t how much a percentage would be too large or too small.

I need help asap.

Re: One Way To Divide Your Company Equity At Start Up

Jake Birkett — Sun, 01 Feb 2009 17:35:08 -0000

Yes the Market wage idea is a good idea for sure to address that issue.

Re: One Way To Divide Your Company Equity At Start Up

jgostylo — Sat, 31 Jan 2009 16:02:06 -0000

I think that is where Jeff got it right by putting a person's market wage in the calculation. It needs to consider both what they could be making as well as the skills they will be using for the project. An installers expert usually gets paid pretty well but if that person is just going to put in his time testing the game it should be based on what they are doing.

On the other hand, I am working on a project where I am TRYING to put in the most effort because the other guy is doing stuff way beyond my level of experience and if that fell on my shoulders there is a chance the project would have to be abandoned.

Re: One Way To Divide Your Company Equity At Start Up

Jake Birkett — Sat, 31 Jan 2009 15:20:36 -0000

"Sweat Investment", I like that. I set up a company with two other guys a couple of years back and initially it was equal equity but I ended up doing most of the work so I renegotiated the equity based on that. I kept logs of my time so they couldn't really argue, but they know I'd put in the most as well.

One other interesting factor is Skill Equity, what if the tasks you are doing are the ones that require the most skill? i.e. accounts, website programming, and the others are making the tea and doing the post etc. Well again you may need to adjust the equity to take that into account. Sometimes you think you'll all be using equal skills but it doesn't always turn out that way.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Fri, 30 Jan 2009 10:13:53 -0000

Hey Dave! Nice to see you out here. Judging from the great response to this article, I'll surely be writing more about these sorts of issues.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Fri, 30 Jan 2009 10:11:29 -0000

Heh, nice catch!

Re: One Way To Divide Your Company Equity At Start Up

EricPreisz — Thu, 29 Jan 2009 21:54:55 -0000

You missed the silent partner - the government.

Re: One Way To Divide Your Company Equity At Start Up

robert aste — Thu, 29 Jan 2009 17:41:49 -0000

Is partner 2 trustworthy? Smart to keep the goddam lawyers out of it.

Re: One Way To Divide Your Company Equity At Start Up

David Wyand — Thu, 29 Jan 2009 17:27:00 -0000

Excellent article, Jeff. An open discussion on dividing equity is exactly what a number of indies are looking for, me included. Seeing what you've put together adds a lot of validity to my own thoughts. Thanks!

I would be interested in reading more about the finer points that are often overlooked in more general articles.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Thu, 29 Jan 2009 16:53:10 -0000

Having a partner bail is the reason for my "you get nothing if you leave within two years" clause. This clause deserves and entire article, and I have some personal stories to tell.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Thu, 29 Jan 2009 16:51:40 -0000

Yes.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Thu, 29 Jan 2009 16:49:26 -0000

Nice link on the teaming agreement. It is great to collect a storehouse of agreements like this that can be used as placeholders until your own attorney is brought in.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Thu, 29 Jan 2009 16:47:58 -0000

If I write a book, I'll give you a copy! I still want to compile a bunch of my articles, add come connecting tissue and release it as a free eBook.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Thu, 29 Jan 2009 16:47:45 -0000

I read that article too, but I don't have the link. The writer gave extra equity to the person that came up with the business plan, the person that loses the most sleep if the company is not doing well, etc. The "Intangibles" column in my spread sheet is to cover things like that.

Re: One Way To Divide Your Company Equity At Start Up

Jeff Tunnell — Thu, 29 Jan 2009 16:34:31 -0000

Yeah, this method works for royalties, too. We used a similar method of dividing royalties at GarageGames.

Re: One Way To Divide Your Company Equity At Start Up

jgostylo — Thu, 29 Jan 2009 11:46:28 -0000

Jeff, I like the way you divide the project up algorithmically. Very intuitive. I think that your particular level of professionalism with your game product is a little outside the scope of anything I would be part of right now.

So far when dealing with a project that involves multiple people I have always gone with the approach that you just divide things equally. My viewpoint is that at my level I won't be gaining much by getting a bigger slice and stand to lose the interest of my partners. Also, if I learn nothing from my work and this current project will be the best I will ever do, I never deserved more than equal share because the success was a fluke.

Since my funding is always $0 I like to reserve 50% of the equity for the budget which is only payable by team members. If we have to spend $1500, I don't want to be the one contributing all of it. I want to make sure it is worth everyone's while to pitch in financially. If I do have to contribute it all then I will be glad to take the lion's share of the profits.

I think the biggest thing that needs to be agreed upon is what happens when a partner bails on the project and when can partners kick each other out for non-contribution as unfunded projects tend to run into that a lot.

Re: One Way To Divide Your Company Equity At Start Up

moiremusic — Thu, 29 Jan 2009 11:02:13 -0000

Are we to assume that the "sweat equity" mentioned in the article is the same value as the "Sweat Invest." in the document?

Re: One Way To Divide Your Company Equity At Start Up

joshuadallman — Thu, 29 Jan 2009 10:59:42 -0000

Great blog topic, I actually read one very similar about a month ago, though cannot find the link for the life of me. The author of the other blog took the controversial viewpoint that no, not everyone in the startup is equal, your lead entrepreneur should have a higher percent than say a marketing person, and he submitted an equation to figure out a non-scientific but nonetheless quantitative way to split up the pie fairly - like yours, though based on role, not wage (though wage is tied to role). If anyone knows the blog I'm referring to please post it here, though I'd like to at least back the concept behind it. Splitting the pie evenly is simple, but unless you've got true founding partners, it likely isn't the best way to do it.

Re: One Way To Divide Your Company Equity At Start Up

Wes — Thu, 29 Jan 2009 01:26:03 -0000

Very interesting. I am in the midst of a start-up, so the insight is appreciated.