April 2001 Negotiating Contracts That Protect Your Title and Team By Jay PowellIn the game business, as in life, you don’t get what you deserve, you get what you negotiate. The purpose of this paper is to offer guidelines that will help you negotiate a deal with the publisher of your game. By following these guidelines you will get the publisher committed to your game, and protect your team in the event that something goes seriously wrong.This paper will help you achieve the above by detailing how careful planning and negotiation will ensure you maximize your revenue and provide you with protection in the event the project is canceled.It is very important to have an attorney at your disposal for the entire negotiation process. Even if you do not wish them to handle the negotiations themselves, you should not enter any agreement without having the contract reviewed by a lawyer, preferably one experienced in the interactive industry.Let’s Make A Deal!Prior to submitting your game to potential publishing partners, you must understand what type of deal you want and/or need. The type of deal you are looking for will often determine the underlying deal terms that you can negotiate.For most developers, publishing deals fall into four categories:1. Work for Hire Development Deals -- Publisher brings the developer a concept, property or franchise and the developer creates the game based on the publishers guidelines 2. Early Stage Development Deal – Developer pitches a publisher on a game that they want to make and gets funding from the publisher to create the game 3. Completion Funding – Developer creates a game on its own dime and then at some stage in the development process brings the concept to a publisher that finances the rest of the game 4. Pick Up Deal – Developer completes the game with its own money and then sells the essentially complete game to a publisher Work For Hire Development DealsThese deals will yield the least amount of negotiating power from the four examples listed. In these scenarios publishers are seeking development talent to create games based on the publisher’s licenses or franchises. It is very difficult to get a strong royalty in these deals. They are a reliable form of revenue and generally require a smaller staff. This allows the developer to take more than one contract at a time and balance their risk out. These deals are an excellent way to make aname for yourself in the industry and have a steady revenue flow while planning your original game and creating the initialdemo.Early Stage DealsOffering more negotiating position than Work For Hire deals, these deals are generally reserved for teams with a solid track record. Requirements for this type of deal include a solid design document along with a technology demo running onthe desired platform. When pitching Early Stage deals, you will find the sale to be much easier if you are pitching a game in a genre where your team has proven itself previously. The number of prospective publishers is limited due to the budgetrequirements of these sorts of deals. Publishers will potentially be paying millions of dollars for these games to be completed so they will require a certain amount of control in order to protect their investment. Since early stage deals arequite risky for publishers, they will generally require more demanding terms that limit the developers upside.Completion FundingThese deals offer a good balance of creative freedom and negotiating power. A great demo that shows full playability and demonstrates the unique selling points of the game is a must for this deal. Publishers realize that their risk is less here due to the fact that the developer has funded a percentage of the game from their own money. This will give you a better negotiating position when it comes down to the royalty rates and ancillary rights of the game. The more a publisher can see in the initial pitch, the better chance a developer will have in securing a contract. Many of the Early Stage pitches do not see contracts until they reach this stage.Pick Up DealThese deals offer developers the strongest negotiating position of all the deals. Under these circumstances, a developer has funded the majority of the title and a Gold Master date is near. Publishers have very little risk as they are able to evaluate the final version of the game they will be buying. With this model you will also have the ability to choose betweena country-by-country or worldwide model. The differences in these two approaches can give you the negotiating power necessary to land a truly lucrative deal.Royalty RatesOnce you have decided on the type of deal for which you are looking, you need to concentrate on the basics of the contract you are negotiating. Royalty rates are one of the key determinants of the financial success of your game. However, you may negotiate a nice royalty, but if the publisher never re-coups their money it will be irrelevant.We Need How Many Logos On The Box?Obviously, a high royalty rate is better than a low one. However, it is important to understand how the royalty rate is determined and how your publisher will get your game into the hands of buyers all over the world.If you select a publisher to handle your title that sublicenses the game to other publishers in the major markets, your "high" royalty rate may end up being quite low. This is because you will receive a percentage of percentage. For example, if you give worldwide rights to a publisher that is headquartered in the United States but does not have a distribution network outside of North America, that publisher will receive a royalty rate as well from their international publishing partners. Your North American publisher may be granting a 45% royalty rate to you, but that rate is a percentage of the rate that they negotiated with each of their distribution partners.To offset these losses you can state in your contract that you will have one rate for the territories where the publisher has direct distribution, and a separate rate for any territories where the game is sublicensed. Keep in mind that more companies in the mix means less margins. Look at this factor when you are selecting your initial partner in a worldwide deal. Do they have the depth of distribution that you require? Is the US company you are dealing with going to sell the titleto a Pan-European company who will in turn sublicense it to country-by-country publishers?What Am I Receiving A
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