Starting a new videogame studio? Here’s what to remember

Although the videogame industry is experiencing a bit of financial turmoil at the moment—as many other industries are, too—videogames are still created every day by studios large and small, old and new. 

But starting up a videogame studio can be a daunting task, and there are a lot of things to think about. Especially when it comes to issues like copyright, partnerships, and equity; that’s where it really can get quite minute and complex. Nevertheless, it is crucial to have all your legal ducks in a row when you’re kicking off a new videogame venture. But what challenges, exactly, does videogame law offer? Let’s dive into it (duck-pun intended) with the help of Tommy Persson, founder of Lawyer.se and seasoned videogame lawyer.

Copyright

One of the key legal issues to keep in mind for any new founders, is copyright, Tommy said. Anything that appears in a game—be it a storefront, a soda bottle, a piece of clothing, or something else—must either be created by the studio itself, or it must have permission to use it from the original creator. If not, the studio could be in violation of copyright laws, which, if unlucky, could negate years of work. 

Tommy recalls a client many years ago who had taken a photo of some graffiti in an alleyway in New York and wanted to use the tag in their upcoming game. But the publisher quickly put a stop to that. «Even an illegal graffiti tag is subject to copyright laws,» Tommy explained. 

Partnership and shareholders agreements

If you’re starting a studio with other people, having an agreement between the partners is essential, advises Tommy. Such an agreement can include many different things, some which are dependent on whether the studio is an incorporated entity or not, but they should all include the rights, responsibilities, and obligations of each partner. For example: it’s important to be clear on who is responsible for creating what, as well as who owns the material created—that could be the individual partners themselves or the studio. This is to avoid trouble down the line if, say, one partner wants to drop out or disagreements arise over the direction of a project. 

«If three people have worked on a game for two years, and suddenly one gets a great job offer, then we must have language in our agreement that outlines if the other two are allowed to continue using what the third person created,» Tommy said. «It’s happened many times that one member of a studio gets their dream job and takes their code with them, and suddenly a cornerstone of the game the studio is working on, is lost.»

Making sure everyone on the team is on the same page on the long-term vision of the studio could also be an important step when starting up a studio. 

«It’s like a rock band; if you’re not in sync, the beat is going to be off. Even if you are friends, things can happen, and there must be a contract in place when that happens so that everyone knows what happens,» Tommy said. 

Publishing

Unless a studio wants to self-publish its game—which it very well may do—there will come a time where it has to sign a deal with a publisher. These deals can be tricky, especially because of the power imbalance between what may be a small, newly started studio and a publisher with big legal teams and deep pockets. But there are ways for studios to reach an agreement its partners can be content with. 

But before signing anything, forming a corporation is often smart, protective measure, as it moves liability for things like copyright infringements from the individual members of the videogame studio, to the studio as a corporate entity. 

In a negotiation with a publisher, it should also be ironed out who owns the rights to things like sequels, movies or TV shows based on the game, and merchandise. The deal could also include what happens if the game makes it big and the money the studio initially received is no longer proportional to the value of the game. «If you sell a game for $10,000 to a publisher and then it becomes a hit with a million copies sold, maybe you’ve negotiated so that you get a percentage of sales or that you have the right to create the sequel,» Tommy described. 

An experienced videogame law firm can also help making sure studios get a decent agreement. 

Commercial licenses

This might seem like a small detail, but if forgotten, it could have devastating consequences. A studio should make sure it owns the correct licenses for the software programs used to build the game; if not, Tommy said, the studio might not be allowed to commercialize what it has created in a program, under the terms of that program’s license. «If we’re three students who have student licenses for a game engine, are we allowed to release a game built on that engine? Most likely not. You need a commercial license in most cases» he added. 

Equity and acquisitions

It happens that a studio or an investor wants to acquire a piece of a videogame studio, and new founders must be aware of this possibility. To prepare, the partners should be clear on where they stand on the issue—maybe one or some of the partners want the studio to remain an indie studio no matter the offer—and have an exit plan, explained Tommy. 

There are also legal concepts like drag-along rights and tag-along rights that might become relevant. These are usually part of the shareholders agreement between the founders, and give the majority of the partners the right to «drag» the minority into an acquisition, or the right for a partner (or partners) to «tag» along on a deal even if it’s only the partners’ stocks which are acquired. 

When equity of a studio is purchased, Tommy noted that it’s wise to also include in the agreement what the studio guarantees is free from errors, and for how long the guarantee lasts. This is to protect the studio from liability in the future. «If the acquiring party comes many years later and says, ‘The code is wrong’ and demands $50 million in damages, that can be devastating,» he said. The contract should, therefore, include language that protects the original partners from perpetual liability, as well as a limit to how much the investor can demand in damages. 

Tommy added that negotiating non-compete agreements should also be part of the dealmaking process. «If a studio gets bought out, a non-compete might stop you from working with videogames for several years. What will you do then? Start flipping hamburgers or sell hot dogs?» he said. Here, studios can also negotiate, and maybe reach a deal where the non-compete lasts for one year and includes some money in return. «If you can’t work on games for a year, you’d want a decent compensation.»