Congratulations, you received a term sheet!  While the main terms, such as valuation, are certainly important, there are numerous less noticeable terms that can have just as great an impact.  One such term is “fully-diluted”.

What is a fully-diluted calculation?

A fully-diluted calculation assumes that all options, warrants and other rights to acquire stock have been exercised or converted, regardless of whether they are actually vested or exercisable at the time of the offering.

Let’s illustrate the impact of a fully-diluted calculation compared to a funding round without full dilution.

Startup has issued 1,000,000 shares and 100,000 options.  None of the options are vested.  Investor desires to take 10% interest in the company.

Not fully-diluted:  Startup will use the number of issued shares only to calculate the 10%  and will issue investor 111,100 shares (representing 10%).

Fully-diluted:  Startup will use the total number of issued shares and options to calculate the 10% and issue the investor 122,200 shares.  However, since none of the options are vested, and may never vest, investor actually acquired a present-day interest of 10.89%.

While the above example seems benign given the .89% difference, that percentage could be worth a large sum if the company exits in the future.  What if you are selling an almost controlling interest in the company, perhaps 23.5%?  In that case, a fully-diluted calculation could result in a sale of a 25%+ (and controlling) present-day interest depending on the number of outstanding options etc.  In other situations, an investor may request that the entire option pool (even if no options have been granted) be factored into the fully-diluted calculation – in the case of a 12% option pool, this term would have a substantial impact.

In sum: while you may not be able to avoid a fully-diluted calculation in a term sheet, it’s important to understand its impact and to negotiate with that impact in mind.

Germany has strict rules governing video game content that large studios and indies need to comply with before publishing or advertising a game in Germany.  Breaching these rules is costly as fines may total $550,000 USD in addition to (in some cases) constituting a criminal offence.  Often, the laws result in modified video game content just for the German market (see: Half-Life, Wolfenstein).

By factoring these rules into development you can facilitate a smooth release in Germany.

1. What Content is Unlawful in German Video Games?

It is unlawful to display violations of human dignity, propaganda material of unconstitutional organizations (especially Nazi symbols), glorify violence and war as well as certain pornographic content.  See Article 4 for the full list.

In addition, it is unlawful to provide content that has the potential to impair the social and emotional development of children if you don’t take precautions to shield children from the content. Depending on style and presentation, games that cover violence, sex or drug use can fall under this category.

2. Does my Video Game Violate German Law?

If you’re unsure whether your game violates German law, there are two ways for your game’s content to be reviewed:

A.  You can have it pre-assessed by the German certified self-regulation organization USK.  The organisation offers basic initial assessments at a flat rate equivalent to $330 USD. You can also apply for an official rating which will prevent your game from being put on the “index list” of restricted content allowing for legal certainty before launching. This assessment entails a test run of the game and costs up to an equivalent of $1,320 USD. For a yearly fee equivalent to $3,300 USD, you can also become a USK member, which includes customized child protection solutions and a certain degree of protection from fines and other administrative measures.

B.  If your game is sold through certain marketplaces (Google Play, Nintendo eShop and Windows Store), you can obtain classification via the International Age Rating Coalition. This system is free to developers and allows you to rate a game using a complex questionnaire.  As of October 2016, IARC will be recognized as an official age classification system by German authorities.

3.  Wont Somebody Please Think of the Children!

As mentioned above, for some games, child protection measures have to be taken.  Examples of such measures include:

A.  tagging your website with an age restriction label; and

B.  restricting game distribution to adults, for example by using an age verification system.

Content that is deemed specifically harmful to children may only be made available to adults in closed user groups.  In addition, if you act as a website provider, it might be necessary to appoint a “Youth Protection Representative” to ensure compliance.

While these requirements are not minimal, it’s important to take them into account if you plan on Germany constituting a portion of your game’s market.

Thanks to guest writer Dominika Wiesner, a German trainee lawyer  working in our office this summer, for her work on this blog post.

We represent quite a few video game studios, many of which are indie.  Regardless of studio size, we are often called to fix legal mistakes that could easily have been avoided.  These legal mistakes frequently fall into one (or all) of the following five categories:

1.  Don’t forget to incorporate or incorporate too close to the date of launch.  Often incorporation is left to the last minute and only happens when Steam or Apple asks for a company name.  This is a problem as game intellectual property (IP) must be transferred to the new company at its fair market value, which may be more than nominal (given that it is about to be sold) and could involve complex tax solutions.  By incorporating earlier in the development cycle, you can put in place proper agreements so that the company owns game IP from day one.
2.  Don’t create complex corporate structures with no purpose.  If you don’t know why your company has a particular corporate structure, you likely don’t need it.  The more complexity, the more likely mistakes will be made in the future when you use a certain structure for a different purpose than originally intended.
3. Don’t  forget to assign IP to the studio.  The company needs to own game IP as, without, it cannot sell the game since it does not own the game in the first place.  This can be remedied through employment, contractor or IP assignment agreements.
4. Don’t use oral agreements with independent contractors.  Use independent contractor agreements to document the studio’s relationship with contractors and to ensure the company owns the contractor’s work.
5. Don’t sign publishing agreements without review.  Have a lawyer review your publishing agreements as there is often a disconnect between the terms you negotiated and the publishing agreement terms (often unintentionally, given publisher reliance on agreement templates).

By keeping the above in mind, you should be able to structure your studio correctly and save the legal fees otherwise incurred to clean these sorts of mistakes up.  For our indie clients, we certainly understand that they would rather put money into development than into legal fees!

If your startup or video game studio’s business involves IP licensing (it likely does), it’s important to understand common IP license terms.  Proceeding with an IP license without fully understanding key license terms can have a disastrous impact on your company’s future.

Let’s start with the obvious:

A.  Licensor.  The person/company granting the license.  If you own the IP and are licensing it to another, you are the licensor.

B.  Licensee.  The person purchasing the license.

Now onto an overview of (some) important terms:

1.  Perpetual.  This is the most important term in any license.  A perpetual license is one that continues in perpetuity and will only end if the licensee breaches the license terms (rare).  If you see the word perpetual, assume that the license lasts “forever”.  This works in some cases but if you actually intended to license the IP for a fixed term, perpetual is the wrong word to use.
2. Term.  If the license is not perpetual it has a fixed term (typically a number of years), which you must specify.  Once the term ends, the license ends .
3. Exclusive vs Non-Exclusive.  An exclusive license is one that only the licensee may use.  For example, if you exclusively license your video game to a publisher, you cannot publish it yourself.  Conversely, non-exclusive licenses permit additional licenses.  You can limit exclusive licenses by, for example, imposing platform or geographic restrictions:  exclusive license for distribution only on the Apple iOS store in Germany.  If you still plan on using the software yourself, internally, be sure to retain rights to your own software when granting an exclusive license!
4. Worldwide/territory/other scope.  Specify the scope of the license, such as whether it applies only to a particular geographic region, technology platform or type of end user.
5. Sublicensable.  A sublicensable license means that the licensee can grant licenses to others.
6. Assignable.  An assignable license can be transferred to another, removing the original licensee from the license.  Typically, licenses are assignable only upon mutual agreement, an acquisition or bankruptcy.
7. Derivative works.  By permitting the creation of derivative works you permit the licensee to modify and create new versions of the licensed IP.  The license to make derivative works can be limited (for example, to ensure compatibility with changes in operating system versions) or broad.  It is usually the case that the license prohibits the creation of derivative works.

When reviewing an IP license agreement, I often recommend starting with a review of the license terms and to watch for the above terminology.  Each term can alter the scope of the license and you need to ensure that the license terms are consistent with the terms you previously agreed to.