Tag Archives: video game lawyer

Our Most Popular Posts of 2018

With 2018 coming to a close we’ve decided to look back at our most popular blog posts of 2018.   Interestingly, all of these posts are on the subject of capital raising/financing, which should be of no surprise to anyone who works in the technology sector!  Now, onto our most popular posts from 2018:

1.  Priced Rounds

In our most popular post we discussed the benefits to priced financing rounds, rather than convertible instruments, for early-stage financing rounds.  We also cautioned that some investors prefer convertible instruments and others will reject a priced round valuation but accept the same valuation (or higher) as the cap on a convertible instrument.   At the end of 2019, I still prefer priced rounds for early-stage investments but only if a Common share is on offer.   I am not fond of preferred share priced rounds prior to a company’s Series A financing (I’ve seen this more than normal in 2018) as this is too early a point in a company’s life for such a complex financing structure and the additional restrictions that often follow.

2.  Things Every Startup Should Know Before its First Financing

In the runner-up post, we laid out four things every startup should know before embarking on its first financing: (1) know your investment structure; (2) have your investment documents ready; (3) don’t treat investor interest as commitment; and (4) be realistic in the timeline for closing the investment round.  I’ll add a fifth: know all your outstanding equity obligations and clean them up before starting the round.  Put another way – all those equity offers you wrote yourself can’t be ignored and need to be cleaned up before the first financing begins.

3.  Video Game Profit Sharing Structures

Finally, in third place, was our post detailing three common structures for video game studio profit sharing: (1) draft a profit sharing agreement; (2) create a separate company for each game; or (3) issue shares to profit share participants.  While clients came to us with numerous structures for profit sharing in 2018, all went the profit sharing agreement route due to its flexibility.

That’s it for 2018.  Stop by again in 2019 for more posts on the law of startups and video game studios, from a Canadian and US perspective.

The Two Questions I ask new Startups and Studios

Each week I meet with prospective clients that are excited to be launching a new startup or video game studio.  Regardless of the differences between these clients, I inevitably end up asking two important questions at the start of every meeting:

1.  Have you incorporated?

Many clients incorporate without legal counsel, which I have no problem with.  However, by incorporating without a lawyer, prospective clients are often left with a few problems that I am attempting to unearth and that I know will need to be remedied:

A. The company’s paperwork is incomplete.  While a company exists once the filings are made with the state/province/federal government (if a federal, Canadian company), there are a number of resolutions, registers, receipts and other documentation that a company requires in order to have a complete minute book.  The preparation of the foregoing is the bulk of a lawyer’s work incorporating a company and will need to be prepared, especially if the company aims to raise capital as this documentation will be requested as part of standard due diligence.

B.  Too few shares were issued.  If you incorporated a company with 1, 10 or 100 shares, too few shares were issued and should be split or additional shares issued.  This avoids fractional shareholding in the future (imagine offering someone .25% and 10 shares are issued to date) and also makes equity offers to prospective employees more appealing (10,000 shares appear more attractive than 1 share, even if the same percentage ownership results).

C.  Too many share classes created or the wrong share classes created.  I always ask clients their reasons for a particular share class as both client and lawyer should understand the reasons behind the company’s structure.  Since most startups are incorporated with a single, common, share class, I push prospective clients to explain and even justify other classes.  Additionally, if a preferred share class exists, what are the rights and restrictions associated with this class?  Inevitably, no preferred rights and restrictions were specified,requiring the creation of these rights or restrictions or, more likely, deleting the preferred share class.

2.  Have you Transferred IP to the Company?

Clients mistakenly assume that the company they incorporate automatically owns the intellectual property they create.  While someone may be a shareholder (even the sole shareholder) or a director, this does not automatically transfer ownership of intellectual property created by such person(s) to the company.  Indeed, without a contractor, employment or assignment agreement in place, each founder remains the owner of the intellectual property they create.  As a result, the company may not own a core asset and cannot be in a position to license that asset to third parties.  Additionally, by asking this question I am often told about contractors who created intellectual property for a founder or the company without an agreement in place, which will also need to be corrected.

Based on these two questions, I am often able to obtain a full picture of a company and its history and put in place the key documents required to address any issues unearthed.   If you are embarking on a new venture be sure to keep these two questions in mind – doing so may prevent future legal headaches (and fees).  Or, you could read my suggestions on corporate structure and IP assignments here and here.

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.