Recently we’ve seen an uptick in interest among video game studios looking to protect their intellectual property, with a focus on protecting characters and game/studio names.
Here is a list of priorities that should be considered when determining or developing a video game studio’s intellectual property strategy (in common order of priority).
1. Trademark protection for the game name and/or logo
With a successful game comes the risk that a competitor may produce a similar game and brand it with similar game title and/or logo. Obtaining trademark protection of a game title and/or logo ensures your right to stop competitors from using the goodwill and reputation associated with your game title and/or logo.
2. Copyright protection for game characters
Obtaining copyright registrations is best suited for protecting the main character or characters of a game and can be used to stop unauthorized or unlicensed use of the character(s) on things such as t-shirts, plush animals, bobble head toys, clothing, hats, cups and mugs, etc.
3. Trademark protection for a studio name and/or logo
Finally, the studio should protect the goodwill and reputation associated with a studio name and/or logo through trademark registrations.
While a studio may not have financial resources to pursue all of the above at the start of development, it’s critical for the studio to at least develop an intellectual property portfolio strategy and plan to execute over time as resources permit.
For our video game clients, protecting intellectual property is an important part of their business. Intellectual property protection for a video game commonly comes in the form of trademark and copyright but may also involve patents and trade secrets
Trademarks can protect the titles and logos associated with a game. Without a registered trademark, another studio could register a trademark that is confusingly similar to your existing game, thereby creating confusion, negatively impacting your ability to enforce trademark rights and potentially the complete loss of all trademark rights.
Copyright can protect game code, artwork, music and characters. A copyright registration could be obtained on a particular character used in a game to prevent third parties from creating and selling plush toys based on the character.
Patents can protect new and innovative hardware, systems, technical solutions, innovative game play or design elements and technical innovations such as networking or database design.
Trade secrets can protect customer mailing lists, pricing information, publisher contracts, developer contracts, in-house development tools, and terms and conditions of any agreement the studio enters into. Note that the enforcement of a trade secrets requires that a confidentiality agreement be put in place.
The following chart provides a helpful overview of intellectual property protection options:
|Music||Studio name||Hardware systems||Customer mailing lists|
|Code||Studio logo||Inventive game play||Pricing information|
|Story||Game title||Technical innovations such as new software, networking or database designs||Publishing contacts|
|Box design||In-house development tools|
|Website design||Deal terms|
We recommend that studios become familiar with the range of intellectual property protections available and to prepare an intellectual property strategy for both the studio and its games.
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:
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.
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.
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.
Our video game studio clients often come to us with plans to split game profits among the team members but require advice on the form this split should take. Three main approaches exist for structuring your video game profit share:
1. Profit Sharing Agreement
The most common approach is the Profit Sharing Agreement. This agreement is between the company and each person participating in the profit share and sets out the profit sharing terms and contains key terms such as:
- How profit is calculated. For example, revenue received by the company from sales of the game minus publisher royalties, platform fees, certain operating costs etc.
- What constitutes the “game”. Does the game include DLC, HD/upscaled/remastered versions, sequels etc.?
- Adjustment of each person’s percentage if future participants added.
- What is the profit sharing duration?
- Is there a cap on payouts?
- Termination upon acquisition of the company or the game, perhaps with a lump payout.
- What happens if the company receives investment?
The benefit to this approach is that the participants are not shareholders in the company and, as a result, do not have a say in how the company is operated or a right to receive payouts from future games developed by the company. However, the parties need to ensure that the agreement is thorough in its scope as any ambiguity or overlooked scenario could create major headaches in the future.
2. Create a Separate Company for each Game
Under this approach, a separate company is created for each game you develop, with the commonality being that the main company you incorporated (the studio) is a majority shareholder (51% and up) in each of these separate companies. For example: Studio Company owns 66 2/3% of Game 1 Company. The separate company would receive profits from the game and distribute them to the shareholders based simply upon their shareholding (although more complex special rights and restrictions could also be put in place). Intellectual property for each game may rest with the separate company or the main company. Profits from the game would be distributed as a dividend to the shareholders.
This approach works well if each person is expecting an interest in the company developing the game with the benefit that these persons cannot participate in future games developed by the main company (which may be unrelated to the current game). However, when pursuing this approach, it is important to obtain tax advice to ensure that distribution of the profits between the companies is structured efficiently.
3. Issue Shares in your Company to Profit Share Participants
Under this approach, a special class of non-voting share (the profit share class) is issued to the profit share participants and contains a dividend right to receive a portion of game profits, which would contain similar terms as described in approach 1 above. This approach is similar to approach 2 above except that no separate company is created. However, additional terms are also required, such as:
- Share retractability: this allows the company to repurchase the profit sharing shares in the future.
- Voting trust: this takes control of some or all of the voting rights of the non-voting shareholders (see non-voting shareholder’s limited voting rights).
The problem with this approach stems from the fact that the profit share participants may only be involved in one game but the studio may continue on to make other games, which the profit share participant should not receive a financial benefit from. Further, by being a shareholder (without detailed share rights and restrictions), the shareholder may be able to participate in profits from future, unrelated titles, benefit from sale of the company and/or exert their rights as a shareholder to participate in the company’s direction. To alleviate these problems, complex terms and agreements are likely needed (see retractability and the voting trust) to ensure that the profit share shareholders only benefit from the game they worked on and have a limited right, if any, to participate in the company’s direction.
As a first step, it’s critical to recognize that your profit sharing agreement needs to be documented in writing. Second, you must reflect on the relationship you desire with the profit sharing participants (duration, scope of their involvement etc.) and analyze that relationship relative to the features of each of the above approaches.