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.

The U.S. Federal Trade Commission recently completed its first enforcement action against an undelivered Kickstarter project and resulting in an agreement to repay over $100,000 in campaign pledges.  The FTC alleged that the campaign deceived supporters and spent money on items unrelated to the campaign.   While not all undelivered crowdfunding campaigns will prompt FTC action, this first action lays out important rules to follow so as to avoid deceptive claims in your crowd funding campaign.

In the enforcement Action, the FTC implicitly set out four standards to comply with so as to not misrepresent a crowdfunding campaign to consumers:

1.  How will funds be used.  Don’t use campaign funds for purposes unrelated to the campaign, such as personal expenses or for other businesses or projects.  Where your project fails, don’t use campaign funds for a different project as backers never agreed to provide funding for a different project.

2.  Deliver your deliverables.  Don’t promise and not deliver the deliverables, including perks, you promised to each backer.  In order to avoid this issue, it is recommended that you research the exact cost of each deliverable to ensure that it is financially viable and can be manufactured on time and to the specifications promised to backers.

3. Don’t misrepresent the project.  Be honest as to the stage of development the project is at and the features that will be integrated into the project.  If a feature is not possible, don’t imply that it is part of the project or that it may be possible.  The FTC wants consumers to understand exactly what they are contributing to and not be mislead as to what the project delivers.

4.  Be honest about your skills.  You should set out the expertise/qualifications of any person associated with the crowdfunding campaign honestly.  Do not mislead backers as to team member expertise as the team is equally important as, and essential to the success of, the project.

Running through the above standards is a single rule:  don’t misrepresent, expressly or by implication, anything in your crowdfunding campaign.  Similar to a store selling goods, running a crowdfunding campaign requires you to clearly present to prospective purchasers what you are selling and who is involved in the item being sold.

Whenever a developer discovers a copied version of their app/game, their immediate concern is how to remove it.  This post aims to outline the process for removing content that infringes your copyright from major app/game stores.

All major stores operated by U.S. companies (and often foreign companies) comply with the United States Digital Millennium Copyright Act (“DMCA”).  Simply summarized, the DMCA provides a notice-and-takedown procedure whereby a notice of copyright infringement sent to a DMCA Agent leads to the take down of infringing content.

STEP 1.  DMCA Notification

The DMCA Agent should be your primary contact as the DMCA specifies a procedure for copyright infringement claims and major stores will follow the procedure.  Here are links to the DMCA Agent for each major store:

Steam:  https://steamcommunity.com/dmca/create/

Apple:  http://www.apple.com/legal/internet-services/itunes/appstorenotices/

Google Android:  https://support.google.com/legal/troubleshooter/1114905?product=androidmarket

Facebook:  https://www.facebook.com/help/contact/208282075858952

Microsoft:  https://www.microsoft.com/info/cpyrtInfrg.aspx 

You must complete and send the notice of copyright infringement contained in these forms to the DMCA Agent in order to initiate the DMCA process.  After you send notice, the DMCA Agent should remove, or disable access to, the allegedly infringing app/game and send notification of such removal to the infringer.

DMCA Agent response time varies.  Indeed, U.S. courts are currently determining what period of time constitutes a reasonable response!

STEP 2.  Utilizing Connections and Social Media

After sending the notification, feel free to contact anyone you know at the app/game store or use Twitter and other social media to push your cause.  Often a campaign will cause a quick response from the DMCA Agent.

STEP 3.  Cease and Desist

Consider sending a cease and desist letter to the infringer as well, requesting that they remove the infringing content from the store (perhaps also request sales proceeds).  Where the store or website does not comply with the DMCA, this may be the first or second step.

STEP 4.  DMCA Counter Notification and Lawsuits

The infringer may respond with a counter notification claiming that the allegedly infringing content was removed as a result of mistake or misidentification.  The DMCA Agent, upon receiving counter notification, will let you know about the counter notification and will put the  content back on the store in 10-14 business days, unless  (before the content returns) you seek a restraining order against the alleged infringer and inform the DMCA Agent of the order.

In reality, the DMCA Agent likely will not receive a counter notification in the case of a blatant ripoff of your app/game.  Nonetheless, it’s important to know the steps that follow DMCA notification.

While video game publishing is moving from third-party to self-publishing, third-party publishing agreements still come across my desk for review.  Regardless of your reasons for inking a publishing deal, you should understand the importance of finely reviewing the agreement – otherwise, your business may be severely impacted in the future.

Here are 8 common clauses in publishing agreements, questions to ask and approaches to take:

1.  License Grant/Ownership:  Is the license limited to one platform?  Is the license exclusive and how long is this exclusivity?  What does the license apply to?

The license clause is the most important as it deals with what rights the publisher has to the game, characters or even the game’s universe and what rights you are giving up.  A broadly written license clause may take more from you than you agreed to orally with the publisher.  I have seen license clauses granting an exclusive license to all the characters and the game universe.  In this case, while you may have intended to license just the game, a license to the characters and universe may limit your ability to produce any sequels in the future!  In reviewing a license clause, focus on exactly what rights are given up and consider how the loss of these rights could impact your business in the future.

2.  Payment of Royalties/License Fee:  How are, and how often, are you paid?  How are payment amounts calculated and can you audit the numbers?  What happens if you are not paid?

Payment is key for any studio and it is important to make sure that the payment section of the agreement is clear on how the amount you are paid is calculated (minus publisher expenses?) and what happens if you are not paid.  If possible, insert language providing for termination of the license if you are not paid timely.  If you receive payment based on sales, consider requesting audit rights to make sure you are receiving the correct amount from the publisher.

3.  Term:  How long does the agreement last and what happens when it ends?

You want to know how long the publishing agreement lasts and how it ends.  Ideally, all rights are returned to you when the agreement ends or the publisher goes bankrupt/stops selling the game.  If you receive payment based on sales, you don’t want a publisher to stop selling your game and leave you with no rights to it.

4.  Non-Compete:  Is it even enforceable?  What is the non-compete scope?

While the enforceability of non-compete clauses varies between jurisdictions, I frequently see unenforceable non-complete clauses in publishing agreements.  Where there is a non-compete, look into whether it is enforceable!  Additionally, look at the scope of the non-compete and whether it could impact future games.  For example, if the non-compete says “no WW2 RTS games,” and this is your bread and butter, you have a problem.

5.  Bundling/Discounts:  Are there limits to sale pricing?  Can the publisher bundle your game with other titles?  How soon after launch can the game be bundled?

While you often do not have much control over bundling/discounts, consider pushing for restrictions on when and how much the game can be discounted.  For example, 2 months fixed price, discount from launch price (up to X percent) after a certain date and bundling not to occur until 6 months after launch.

6.  Right of First Refusal on Future Games:  Do you want the publisher involved with future games?

Publishers often request a right of first refusal on future games in the series.  These clauses can be problematic if the relationship with the publisher breaks down as you are still forced to offer sequels to the publisher.  Be sure to include a final date by which a publisher must tell you whether they want to publish the sequel under a ROFR.  Without a final date, you may be faced with ambiguity as to the distribution of future games.

7.  Promo:  Are there limits on how the game is marketed?

If possible, set a lower and (possibly) upper limit on publisher promotion expenses.  If you have been promised exposure at major industry events (ex. a place at the publisher’s booth) be sure that this is included in the agreement.  Too often I meet studios promised certain levels of exposure that was not delivered and never included in any written agreement.

8.  Governing Law:  What law governs the agreement?

If possible, push for a governing law clause (X law and X courts govern the agreement) from a jurisdiction that is reasonable for BOTH you and the publisher.  If you are a U.S. studio, a Swedish governing law clause would not be cost-effective or reasonable for you and could be reason for you never to contest any issue with the publishing agreement.  A possible solution is to suggest a neutral jurisdiction.

I tried to cover the major clauses I see in publishing agreements and to lay out concerns I often encounter in these clauses.  As always, the above list is not exhaustive and I recommend that you review all publishing agreement clauses with a sharp eye – remember, the agreement has the potential to impact your business and games for years to come.