Avoiding Game Development Contract Pitfalls - Royalties
!(/assets/soundexchangeartist.jpg)Here at @Gamelinchpin we like to clear some of the fog surrounding themore complex business of making games.Negotiating contracts can be tough, and there’s a lot to think about butdon’t let some of the most important elements slip you by. Getting theseright can make the difference between scraping by and living well andit’s not easy if you lack experience but we’re here to help.I’ll start by going through some common elements of royalty clauses. ** ** I’d like to start out by saying always take professional legal advicebefore signing a contract, the information below is my opinion onlybased on experience.Is it worth it?YES! There’s a myth that it’s pretty much impossible to achieveroyalties on anything but the killer AAA multi-million selling items butI’ve seen many cases where the route to success is often in being awareof what options you have, and what to avoid too.Common PitfallsWhen thinking about royalties it’s important to really think about allof the different facets of the deal piece together as even the smallest,seemingly irrelevant clause, can mean the difference between makingmoney and losing out completely. Keeping all the different elementsbalanced is something that comes with experience.There are a few things to think about but mainly always think about therate you’re going to recoup the advance at and what you are recoupingagainst as misunderstanding these 2 elements alone can be the ultimatekiller.Recoup RateIn this section I’m assuming that we’re talking about a typical modelwhere the cash you’re given to make the game (Advance) is recovered,along with other costs, before you start getting any royalties on theprofit. This Advance Against Royalties is a common scenario but it canbe improved. Think of it as a debt you have to repay.Now, this bit involves a bit of maths to understand the implications ofso I’ll go slowly for you all. :)Now, typical royalty schemes employ 1 rate that applies through youragreement. In it’s simplest form the publisher takes the money it getsand allocates a portion of that cash to repay the loan they gave you tomake the game (Advance). When it’s paid back you get the remainder asroyalties.Lets look at a work example where the royalty rate is 10%, but thisobviously varies in real life.The thing to watch here is the portion of the cash they use to repayyour debt (Advance), if this were your royalty rate of 10%, they wouldneed to make 10 times that amount (100% divided by your royalty rate)before your advance is fully repaid and you get royalties.Now, there’s no reason why the recoup rate cannot be different to theroyalty rate. Lets imagine that you now have a recoup rate of 25% anda royalty rate of 10%. Now the publisher only needs to recoup 4 timesyour Advance before you start seeing royalties at 10%. This is a bigdifference and really compounds over time.In a typical contract, the 2 rates are balanced based on how thenegotiations with the 2 parties go. I have seen quite a wide variety ofvalues suchas: 20% recoup and 30% royalty 10% recoup and 10% royalty 75% recoup and 30% royalty 100% recoup and 5% royaltyI have even seen 1 extreme case where the Advance was written offand a low percentage royalty was paid. In this case the developer sawroyalties from day 0.It is also possible to gain an agreement on hard unit numbers too onceyou’ve worked out the nitty gritty of all of the parameters. E.g.,instead of recouping your Advance at some rate, you start on royaltiesonce your game has sold 100,000 units.If you can work this out upfront and get the actual number of unitsdown in your contract, then there’s no variance or disagreement lateron and quibbling over what is/isn’t recoupable against your advance.Net ReceiptsBefore I move on, I need to explain some of the core concepts. I’llassume you know the difference between Gross and Net but there’s a keyphrase typically used in contracts called “Net Receipts” that I’ll tryand explain.Net Receipts refers to actual bit of money left over aftereverything else has been taken out. This typically includesundefined, variable and uncapped expenses such as Marketing andRetention / Returns.Marketing budgets are incredibly hard to nail down as they typicaldepend on prevailing conditions & rates, maybe there’s a competingtitles that warrants more of a push for yours, maybe there’s someco-marketing deal being struck. The key here is to try and get as muchof this known at the start, there’s should be some value attributed herebut try and get this defined or at least try and cap the amount thatgoes against your royalties.Retention or Returns These terms refer to the amount of cash the publisher retains to copewith unsold or returned stock. This figure is used to reduce the amountyour royalties are calculated against. There’s not a lot you can doabout this but be aware that it’s lurking in the background.The rest of it should be self-explanatory but I’ll happily respond tofeedback if I’ve missed a key component.CurrencyThis is something that’s often over-looked in our world of globaldevelopment and is something to consider if you deal with a publisherthat holds it’s accounts outside of your territory. It’s worth notinghere that some big international companies may not have treasuries inyour native country so currency exchange will come into play.Also, the time between you agreeing the contract and you eventuallygetting paid some royalties can be a very long time and the financialmarket changes rapidly.There’s a couple of things to investigatehere: negotiate the fees in the currency that gives you the best deal, in some cases it may not be the one held by the publisher or you.Secondly, if the time frames and values are considerable then look intoForward Exchange Rates with your bank, where you can get them to agreeon a future exchange rate.What you Recoup againstI’ve explained some of the elements that can massively affect the amountyou recoup against. Recouping against undefined Net Receipts is a dangerous game andone you should seek to nail down what the specifics are as above. Beaware of everything you’re getting yourself into.I’d strongly advice always using a professional company like TCAssociates to exercise your right to audit the royalty accounts as pretty much every audit exposes inaccuracies in yourfavour, sometimes a few thousand and have been known to be millions.Other Areas to ConsiderOne other area to consider is how your royalties are recouped againstitems such as Bundle Deals and how they are affected by any potentialretail discounts such as ‘Platinum’ packs.How will your royalties be affected by different distribution modelssuch as online or retail?Will you be able to gain any royalties on sales of other items such asdownloadable content, t-shirts, merchandising, social network apps,etc?What next?Next TimeIn this series I’ll be going exposing another common contract point suchas Developer Technology and Intellectual Property.If you’ve enjoyed this item, please join the conversation in thecomments, share this item with friends and subscribe to get thenext installment. I’m happy to answer any relevant questions you mayhave that are posted in the comments.Further ReadingEntertainment Law Handbook - Sarassin LLP business affairs consultancy for the interactive entertainment industry.