Priced Rounds

As part of our day-to-day practice, we advise clients on different structures available for early-stage financing rounds.  As part of these discussions, convertible notes and SAFEs are inevitably raised by the founder yet the concept of a priced round is rarely raised and sometimes not even understood by the founder.  Priced rounds were the common approach to financing startups at all stages for over 25 years and are slowly making a comeback, which should be to the benefit of founders.

Understanding the Priced Round.  Priced rounds are simple:  the company and investors agree to a company valuation and the investors purchase shares in the company at this valuation.  Conversely, convertible notes and SAFEs are premised on the parties NOT agreeing to a company valuation, which is answered at a later date when a priced round occurs (typically the series A round) and the convertible notes or SAFEs convert.

When are Rounds Priced?  These days, priced rounds first arise during the Series A financing, where preferred shares are sold to investors.  At this stage convertible notes and SAFEs usually convert.  However, as advocated for in this post, any round can be priced including angel and seed rounds.

What are the Benefits to a Priced Round?  The company knows exactly what % of the company is being sold in the round and the founders know exactly how much they are diluted.  In a convertible note or SAFE financing there is some uncertainty as to how much of the company is actually being sold as these instruments typically convert on a fully diluted basis including the increase in option pool size required by the Series A investors yet the increase in the option pool is unknown until the Series A round.  Additionally, priced rounds eliminate the confusion surrounding how numerous convertible notes and SAFEs, with different caps and conversion terms, convert (these calculations are difficult to understand, even for sophisticated parties).

We encourage our clients to explore priced common share rounds when considering the structure for their next early-stage investment round.   Admittedly, some investors prefer convertible notes and SAFEs and others will reject a priced round valuation but accept the same valuation (or higher) as the cap on a convertible note or SAFE.  While priced rounds may not work in all situations there is no harm in floating this as a possible investment structure.  Indeed, sophisticated VCs, such as Fred Wilson of Union Square Ventures, agree that pricing rounds may be in the best interest of startups and their founders and should be explored rather than avoided.

Real World Items in Games

When creating realistic video games, developers often desire to render real-world items digitally but neglect considering rights held in these items.  A failure to investigate rights held in real-world items is not limited to smaller studios as major developers (ex. Activision) have been sued for using real-world items in their games, such as AM General’s Hummer and certain firearms.   To assist in avoiding these issues, consider the following steps when inserting real-world items into your game:

  1.  Check to see if the item you are adding to the game is based on a real-world item.  For example, modes of transportation, firearms and luxury goods in games could all be based off a real-world item.
  2. When purchasing assets from marketplaces be sure to ensure that the asset creator has not  infringed the rights of third parties.  This has been an issue on the UE marketplace leading to an audit of most firearm asset packages.
  3. If your item is based on a real-world item, determine the rights held in that item.  For example, the design could be covered by a design patent while the name or logo could be trademarked.
  4. If there are rights held in the item be sure to secure a license from the rights holder before proceeding, otherwise you risk litigation and will be running afoul of most representations and warranties contained in publishing and platform agreements you sign.

In many cases, it’s cheaper to design your own items rather than seeking a license for real-world items, which may not be granted.  Take the GTA series and its use of cars of its own design – it’s doubtful that an automaker would license their rights to a game in which the same car is used to commit (digital) criminal offences, including murder.

If you are in doubt whether the particular item or its name is protected, be sure to contact your legal counsel before spending time integrating it into your game.

NDA Pitfalls

Non-Disclosure Agreements (NDAs) are a critical part of a technology company’s legal arsenal but are often relegated to a standard template without much thought.  Too often, I’ve seen NDAs sent by sophisticated companies that contain a number of pitfalls that often negate some of the protections that NDAs are relied upon for.  While there are numerous pitfalls to be watched for when drafting and reviewing NDAs, I wanted to highlight a few pitfalls that I frequently encounter that are often missed by both disclosing and receiving parties:

1.  Duration

While it may seem obvious it bears repeating: the duration of a NDA matters.  Often the NDAs I receive specify a relatively brief duration: usually between 2 and 5 years.  Problematically, after the time-period expires the protections provided by the NDA lapse and the previously confidential information can be disclosed at will.  While you may not believe that confidential information would be valuable 5 years into the future, this could be a costly assumption – image if the Coca-Cola recipe was treated the same?

NDAs should specify a perpetual duration unless you have a specific reason for limiting the duration.  Regardless, if the NDA duration has a limit you should be very careful to disclose only information that you’re comfortable becoming public information in the future.

2.  Who Can be Disclosed to

I often encounter NDAs that classify the NDA itself as confidential information that can only be disclosed with permission from the other party.  While seemingly innocuous, this treatment of the NDA can become a massive headache when it comes time to sell your company or its technology.  For example, you could be prohibited from disclosing the mere existence of the NDA to the purchaser or its legal counsel.

NDAs should permit disclosure of the NDA itself to your professional service providers, third parties proposing to engage in transactions with your company and their professional service providers.

3.  Scope of Protection

Do not neglect the scope of the NDA’s protection.  Obviously the NDA should protect information physically disclosed or spoken to the other party but there may be certain things disclosed to the other party that don’t fall within the typical scope of “information”.  For example, you may want the NDA to protect things that are visually perceived by the other party when on-site or sounds heard by the other party (this could matter if the sound of a machine could be used to determine a key design feature).

Always consider what you are disclosing under the NDA and be sure that the scope of the NDA’s protection matches the scope of disclosure as well as inadvertent, passive, disclosures that may take place.

Ultimately, the pitfalls with a NDA, as with any legal document, originate from the treatment of the NDA as a standard templated agreement.  The NDA is a powerful document that should be carefully crafted to reflect your particular business needs and to avoid the above pitfalls.

You Need a Streaming License

Streamers are increasingly important to the success of indie video games and our clients often encourage streaming as a way to increase exposure without substantial expense.  However, recent streamer controversies illustrate the need for developers to include an explicit streaming license and code of conduct within the game’s End User License Agreement (EULA) with broad grounds for termination.

What is a streaming license?  A streaming license expressly grants users a license to stream the video game but makes it clear that this license can be revoked at any time, without notice or compensation.  Without this language, substantial ambiguity remains concerning the scope of the license and impact of termination.  Consider the following example:

DEVELOPER grants you a license to publicly display the Game on online video streaming websites, such as youtube.com and twitch.com, and social media, such as tweeting a GIF. DEVELOPER may terminate or modify the scope of this license at any time without notice or compensation and will not be liable to you or any third party for any loss incurred relating thereto.

You can also draft the license to fit your company’s particular needs.  For example, the streaming license could prohibit monetization of the stream.

Do you have a Code of Conduct?  In addition to a streaming license, we recommend that the EULA contain a user code of conduct that prohibits certain conduct, such as profanity, nudity etc.  Breach of this code could provide a basis for terminating a user’s streaming license, although not the only basis.

Can’t I just use the DMCA?  Yes, a Digital Millennium Copyright Act (DMCA) claim is the quickest way to secure removal of a stream and  a clear streaming license (with termination language) provides a clear basis for making the DMCA claim.  Without a streaming license, unnecessary ambiguity remains concerning the impact of termination (for example, could liability follow if you terminate a lucrative stream that was previously permitted?).

In sum:  It benefits your streaming community to receive a clear streaming license and to understand the basis upon which the license can be used and revoked.  While you can remove an offensive stream without such a clause (under the DMCA), ambiguity does little to benefit your company or streaming community.