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Indie Legals 1.01: Starting an indie game company
This is a guest post by Alex Tutty, a Solicitor in the Entertainment Software group at Sheridans who specialises in the creative sector with a focus on computer games, digital media and commercial IP issues.
A 2009 Nesta report suggested that the creative industries were capable of growing at twice the rate of the economy as a whole. The closure of Blackrock and Bizarre has seen yet more developers join the already large, and thriving, indie developer scene. The aims and trajectories of indies can vary greatly, and providing an answer to all possible legal issues that may arise is fraught with difficulties. That said, there are some questions and issues that arise more often than others. In this post and in another in two weeks we have set out some guidance on these common issues.
What’s the point?
The first question to ask if you are thinking of setting up as an indie is, ‘what’s the point?’ What precisely are you trying to do? Is it simply to make that game that you have been wanting to make for ages? Is it to start up a business making games on a more long term basis? Or is it something else?
Whatever it is, your first step should be to work out what the goal is and then it will be easier to go about working out how to get there. If you’re going to set up as a business developing games, then what is your plan? How will it be funded? Before embarking on the business you should have a business plan, mapping out where you want to go and how you will get there (See Creating a business plan is not about bullshitting a document).
If your sole aim is to make a game in your spare time, or as a project before starting something else, then it may very well be that the following is not that relevant to you. Your employer might sanction you working on it, or it may not – some do and some don’t. It is worth checking what your employer says if you are currently employed. There are some issues with this arrangement but more of that in Indie Legals 1.02 next week.
If you are making one game yourself you may decide that you don’t want to set up a company, and will instead release that game as an individual. There are issues that you should consider if you do this (such as liability) which are discussed below.
Becoming a business
Aside from putting together a business plan, setting up as a games development business requires a change in focus. Your attitude and approach will change, from being a person who develops games as an employee, to being in charge of a business.
This may sound like a minor difference, but the effect can be quite significant. You may need to pitch for work, handle business administration, coordinate contractors and service providers as well as the handling the game development. Strategic choices need to be made, such as whether to do work for hire to pay for your own development or concentrate solely on your own games. Running your own business and making your own games can be amazingly rewarding, but it can also be a huge sacrifice without the security of a regular pay check.
If you have decided to move forward as a business, and you have a business plan, then one of the first steps should be to set up a company.
Setting up a company
Company formation is quick and easy to do and there are huge benefits in it. If you hate paperwork and dealing with administration, this may seem an unwanted distraction. However, not only can company formation save you money, it can also protect you (See 5 avoidable legal mistakes made by games companies).
Other than being a nice acronym at the end of a company’s name the “ltd” has a very useful benefit, especially in the troll happy world of games. As the recent Lodsy’s patent issues have shown, a developer may not know that it has infringed (or at least someone is alleging that it has infringed) another’s patent, trade mark or other intellectual property until it receives a threatening letter.
The key issue is against whom the other party may bring their claim. If there is a company developing and releasing the game, it will most likely be that company. If there is no company and the game is released by an individual, then the claim will be made against the individual personally. If they are found liable, then they could be made bankrupt if they cannot pay. A company can act as a personal liability shield.
If the claim is against the business trading through a limited company then it is the company that will be liable. If it cannot pay it may go into administration. The key issue is that the directors and shareholders (subject to certain conditions) will not be personally liable and you get to keep your house, car, PC etc.
If you are concerned about the use and possible infringement of intellectual property, or if you want to insulate your business’s developed IP from such threats, then you should consider a company structure which comprises an IP holding company and a separate company which publishes the game under licence. Subject to certain laws, under this set up the IP is kept separate from the assets sold if the publishing company goes into administration.
What if there is more than one contributor working on your game? Company formation means that ownership can be shared through shareholding. Ownership of the intellectual property rights in a game will be discussed next week, but simply put, each contributor to a game can assign their work to the company, so that the IP rights in the game can be owned by one entity. This will make it easier for the game to be exploited and administered (See Demystifying copyright and games).
Without a company, the IP will usually vest in its creator. This can create a difficult situation where a game may be owned by a number of individuals. This may not appear too controversial in the beginning, but joint IP ownership allows each of the owners to object to its exploitation. Should the owners fall out with each other, each can object to their IP’s use. This leaves the parties unable to distribute the game. If a company owns the IP and exploits the game, this issue is more easily resolved. It allows each contributor to have a share of the profit and interest in the company, and should make it easier should the parties fall out. Sadly, you can’t prevent people from falling out, but company formation will make it easier for something to be salvageable from the situation.
Tax, tax, tax
After company formation, tax is payable in three ways. Businesses pay corporation tax, individuals pay income tax which varies with their income, and shareholders pay income tax on a differing rate which also depends on their income.
If you are a shareholder and employee of an indie, you have two ways of paying yourself: either as income or as dividends. By utilising this, both of the taxes payable can be minimised, leaving you with more cash then you would otherwise receive by paying yourself in one way alone.
Another benefit is that purchases made by the business for business purposes can be tax deductable and used to off set profits or losses.
A Demos report published last week showed that the investment community considers the creative industries to be risky. You need to get the fundamentals sorted to help reduce any perception that you are a risky business (ultimately, this is what a VC cares about). It might not stop it completely but it will help.
Securing IP and employees in a company or company structure provides a simple structure into which investment can be made. If the assets are not owned by a single entity or structure, the likelihood of finding anyone who would be willing to invest (close friends and family excepted) diminishes significantly.
Company structures more easily provide for investment to be structured in a number of ways, including a debt by the business, equity in the business or by a mixture of the two. The exact mix and mechanics will vary, and this has been covered on GamesBrief before in the 50 questions series. The important aspect of this is that if you want or need investment, having a business operating through a company from the very start will make for a much more attractive proposition for investors.
In addition to the benefits set out above, there are a number of other benefits that are available to indies who set up as companies, for instance R & D tax credits.
We have been running workshops on starting up as an indie developer around the country. These sessions give indies, and those thinking of becoming indies, a place to chat and ask legal and commercial questions without fear of a bill, with free drinks and crisps. If you want to know where the next one is please let me know and I’ll send you some details.