Tag Archives: Incorporation

Incorporating a Video Game Studio

We represent a number of indie video game studios and are often asked what legal structure should be used when incorporating a video game studio.  Fortunately, the legal structure we recommend for most indie video game studios is simple and cost-effective to put in place.  [Press Start]

  1.  Incorporate.  The studio should be an incorporated company (and not a sole proprietorship, meaning doing business personally).  By incorporating you ensure that the company, and not you personally, would be the liable party should legal issues arise in the future.  We do not recommend a partnership as the split of a partnership could tie up game IP and prevent release.
  2. Create one class of Shares.  The company should have a simple structure comprised of a single class of common shares without a cap on the number of shares that can be issued (otherwise called an unlimited number of shares).   If you are incorporating in the US where an unlimited number of shares is not possible, set a high cap such as 10,000,000 shares.
  3. Issue a few million shares per founder.  Don’t stress about the number of shares to issue – more is better!  Issue at least 1 million shares per founder as this avoids fractional shares should you issue shares in the future and looks better visually if you are trying to recruit people to the company.  The shares should be purchased for a nominal amount, ex. $0.00001/share.  Remember, ownership percentage is what matters and owning 1/10 shares is the same as owning 1,000,000/10,000,000 shares.
  4. Consider reverse vesting shares.  If you are offering shares to a few team members who need to prove their value by, for example, meeting development milestones, then consider reverse vesting the shares issued to those team members.  Reverse vested shares are issued to the team member up front but can be forfeit (entirely or in part) if the team member does not meet certain milestones set by the company, such as a time or development milestone.  By reverse vesting shares you ensure that the company shareholders have earned their shareholding and, without, someone could walk away and keep their shares!
  5. Assign IP.  The company will be licensing the video game to end-users and, in order to license the game, needs to own the game.  By assigning all intellectual property that you have in the game to the company you ensure the company has sufficient rights to license the game.

The above is a simple to understand structure that works for many indie video game studios with a small shareholder base.  By starting with a simple structure you can also easily modify the structure in the future should the studio take off and your legal needs shift.

Shameless plug:  Voyer Law offers a flat fee legal package just for indie video game studios.  Click on legal packages for more information.

Delaware vs Canada Startup Structure

Canadian startups are frequently influenced by U.S.-centric blog posts concerning startup company structure.  Relying on these posts ignores some fundamental differences in how Federal and British Columbia corporations can be incorporated compared to a Delaware corporation.  Indeed, Canadian startups should not ignore such differences as they permit a more lenient corporate structure from which to grow a company.

To start, here is an overview of the Delaware corporate structure typically recommended to startups:

  1.  Authorize 10,000,000 shares.  Delaware corporations must authorize a fixed number of shares at the time of incorporation.  This number can be altered in the future but will require shareholder approval.  The large number is used as: (a) it avoids fractional shares; and (b) looks expensive.
  2. Issue around 5,000,000 shares.  Shares are issued to founders but at least a 1/3 of authorized shares remain unissued for option pool grants and investment rounds.
  3. Allocated shares to option pool.  A certain number of shares are allocated to the option pool.  The art of structuring the option pool, especially in regard to finance rounds, will be discussed in a future post.

Once complete, assuming a 10% pool, 6,000,000 shares (5m founder shares and 1m pool) have been issued or allocated.  The remaining 4 million shares, or 40% of the company, will be reserved for future investment rounds and expansion of the option pool (if needed).

Conversely, Federal and British Columbia corporations are NOT required to authorize, and thereby set a cap on the number of, shares.  Instead, shares can be unlimited, thereby granting the Canadian startup great leeway in granting shares in the future without having to worry about running into the authorized share limit that Delaware corporations face.

Here is what the same startup, incorporated Federally or in British Columbia, would look like structurally:

  1. Authorize an unlimited number of shares.
  2. Issue about 5,000,000 shares.
  3. Allocate the option pool, fixed or rolling.  Given that shares are unlimited, you are not forced to set a fixed number of shares to constitute the option pool, although you could.  Instead, you can set the option pool size as a rolling % of issued shares creating an automatically adjusting pool size regardless of the number of shares issued in the future.

Ultimately, the Federal/BC startup is not faced by the same rigid share structure, governed by the authorized share requirement, that a Delaware startup is, thereby taking away a few of the corporate structure challenges that U.S. startups often face.  With unlimited shares, the Canadian startup’s future share grants are only restricted by the corporation’s constituting documents, agreements with shareholders or third parties and BC corporate law.  Conversely, the Delaware corporation needs to review how a share grant will reconcile with the number of authorized shares and, if needed, increase that number and seek shareholder approval to do so.

Of course, if you want to structure the company exactly like a U.S. startup, you certainly can authorize a fixed number of shares in your Canadian startup!

So, You’ve been Accepted to a Startup Accelerator

Startup accelerator acceptance season is upon us and those lucky startups are now going through the vetting process that follows acceptance into an accelerator.  In order to simplify the lives of founders and lawyers everywhere, I’ve put together a list of key items that often need to be addressed as part of the accelerator vetting process:

1.  IP Ownership.  Make sure all intellectual property developed relating to your startup has been assigned to the company through separate assignment agreements or as part of employment/independent contractor agreements.  Remember, this is where the value in your startup lies.

2.  Clean up the CAP Table.  This is the time to clean up your CAP table and make sure that everyone you’ve “promised” equity is issued their shares and represented on the CAP table.  There’s nothing worse than calculating the number of shares of the company to issue to the accelerator only to realize that you forgot an intended shareholder – your uncle granted 0.5% (undocumented) for doing company taxes a year ago.  Go in with a clear picture, and proper documentation, of company capitalization.

3.  Lock Down Founders.  The accelerator will want to see that the founders and key persons are tied to the company, whether by an employment or contractor agreement.  If your resources are limited, a reverse vesting agreement for founders should suffice.  In addition to IP, founders are a key startup asset.

4.  Canadian Company?  Determine Cross-Border Structure.  If the accelerator is in the U.S., Canadian startups have the extra steps of determining what Visa will allow them to work in the U.S. while at the accelerator and what cross-border company structure will meet company and accelerator needs.  A discussion of company structure can be found HERE.

If you’re not in an accelerator yet, the above are important considerations to keep in mind for running any company and will make future accelerator vetting a seamless process.

Share Structure: do you need so many classes?

I frequently encounter early-stage startups with too many share classes.  If you have read previous posts, you know that I advocate for a simple share structure for early-stage companies (usually common and, if needed, non-voting common).  If more complex structures are required in the future, they can be created then.

When you are considering your startup’s share structure, consider creating only those share classes that you know you need now or will need.  To that end, ask the following questions before creating any share class:

1.  What is the share class to be used for?  You need to understand the purpose served by each share class.  Don’t create share classes because a third party tells you to or because you see other companies with similar structures.  Each share class should have a reason for existing.

2.  When is the share class to be used?  If the share class is to be used at some point in the future, consider whether that class will 100% be suited to that hypothetical future event or will it need to be modified to suit that future event?  Further, what is the likelihood of the future event occurring?  If it seems unlikely the shares will be used in the future, consider not creating that class.  For example, I question the value in creating preferred shares to be used for future investors as you currently do not know what terms those hypothetical investors will want on the preferred share class.

3.  Will your share structure agitate investors?  Perhaps you do have a future use for 4 share classes but what is the impact of this share structure on your capital raising activities?  Will startup investors, used to seeing common share structures (and maybe a non-voting common), take issue with your complex share structure?  This especially could be the case where you can’t explain the reason for the structure.  Always consider how outsiders will view your share structure.

In sum: don’t create share classes without a reason – even if your lawyer says so!  A founder should know their company structure and why it was created that way.