Hello Game Developers,

I have a question that I hope people with your experience can answer:

How do you divide up equity and profits in a creative endeavor?

I’m a product designer and I’m working with some classmates on a bunch of products/inventions that we hope to license or sell. We each have our own part time jobs, class schedules, and other responsibilities. We work on the company when we have time, but a lot of the work and communication is done online. Nobody is clocking in a time sheet or anything because it’s cumbersome to the creative process, and we trust each other enough not to mandate such a thing. But we know that not everyone’s work will go into the final deliverable, and that some contributions are more invisible than others. But how do we split up any money we get if this works out?

The more I thought about the situation, the more this sounded like game development, particularly in modding. I’m sure a lot of great games have spawned as side projects and mods, but at some point the team had to agree on how to divide up the revenue from sales or possibly an acquisition. But if the project has been underway for several years by then, who can accurately remember who contributed what? Even in an established company, one person’s work can be totally cut from the final product, but that doesn’t mean he/she didn’t contribute to the overall success and deserve a paycheck.

Do you have any suggestions or best practices for this kind of thing? Technology has made work so flexible and incongruous, but how can we also make it fair?

Any advice is appreciated.

David

How do you divide up equity and profits in a creative endeavor?

...

Do you have any suggestions or best practices for this kind of thing?

Don't.

Equity is something you absolutely need to protect. Ownership of the brand should only be diluted under the most dire sutations.

Go read the story of Gary Gygax, the inventor of D&D, and how he lost control of his game.

I don't know of any other field where small businesses are so quick to give away their business.

Any scheme you devise that requires you to give up a part of your equity in the program has the potential to be abused. Don't do it by checkins. Don't do it by content. Don't do it by lines of code. Don't do it by designs. Don't do it at all.

How do you divide up equity and profits in a creative endeavor?

...

Do you have any suggestions or best practices for this kind of thing?

Don't.

Equity is something you absolutely need to protect. Ownership of the brand should only be diluted under the most dire sutations.

Go read the story of Gary Gygax, the inventor of D&D, and how he lost control of his game.

I don't know of any other field where small businesses are so quick to give away their business.

Any scheme you devise that requires you to give up a part of your equity in the program has the potential to be abused. Don't do it by checkins. Don't do it by content. Don't do it by lines of code. Don't do it by designs. Don't do it at all.

Except it sounds like they started this thing together and its been years. If a group of you and your friends made a game and one of them decided he got all shares to the project and you and your friends didn't get any of it, would be pretty unfair.

Your best bet is to discuss this between yourselves and find an agreement that works for all of you, do this before you release a product or you will regret it. Money makes friendships complicated and when its not decided whats happening with it before hand you end up with people who think they deserve more than they do or someone who did less work ends up over top of the people who contributed more.

If you guys can't work it out on your own hire a lawyer to help you figure things out because if you don't do it now you will be hiring a lawyer after you release when people feel cheated or that their work was more valuable than others.

It's always nice to get these things figured out ahead of time.

But how do we split up any money we get if this works out?

You should have decided this before you started doing any work. Hopefully you will be able to come with a solution you are all happy with now, but you're in a potentially thorny position: without any prior agreement in place stipulating who retains the rights to work done for your "group" (which would hopefully be some kind of registered legal entity), everybody retains the rights to the things they've done.

This means it's perfectly acceptable for any one of you to walk away (taking all the work that person has done, which you can no longer use, leaving you in a lurch) if they are not satisfied with the deal. This can easily mean your only effective option is an even split of the equity and/or an even arrangement of salary/pay when you are eventually generating sufficient income. Of course that assumes everybody is equally aware of their power in the deal, which maybe not everybody is.

It's likely going to be pretty difficult to sell the idea that you (for example) should get more (or all) of the equity in the company because the other people involved almost certainly view themselves as equal partners now. It's easier to bring somebody on to a project with the understanding that they're not a partner (that they're just doing work for hire, or for some vague agreement of future non-ownership compensation, or whatever) if you do so up front rather than after work has been done. Human nature being what it is, you may very well have screwed yourself out of anything but an equal partnership sort of deal here, especially if you want to stay on good terms with these people.

It's going to be a tough conversation and you may want to have a lawyer involved to make sure you handle the legal aspects solidly and correctly.

Thank you everyone for your feedback. I think I have an idea of how to arrange this now.

Re: Tom

Excellent articles. We will be discussing those things in an upcoming meeting for sure.

Re: Frob

I understand how hard it must be to give up control of a game that you've been developing for years. The nature of my work is less personal and all of my concerns has to do with monetary fairness.

Re: Josh

It's really not that bad. We are still very much in the beginning of this and there's not much work that everyone has put their hands on yet. Most of the existing assets were brought in by me from previous projects.

The nature of my work is less personal and all of my concerns has to do with monetary fairness.

PAY, or money, is radically different from EQUITY, which is ownership.

Recall your question:

How do you divide up equity and profits in a creative endeavor?

You can divvy up profits however you want. But distributing equity is a very bad idea.

Usually the best option is to make distribution of funds entirely discretionary. And if your agreement restricts it to profits, well, you might as well just keep the money for yourself. Otherwise you get into a difficult situation where one person contributes a large number of buggy elements that all later get reverted or fixed by others, and another person writes a small number of compact but critical core functionality plus bug fixes to the bulk code of others. The "bulk buggy code" person can be calculated as having a large number of submissions and a large number of additions, the person implementing fixes and cleanups that submits all the changes in large submissions can be calculated as a negative number of lines submitted and relatively few commits. One is far more valuable than the other, but trying to put that into codified contractual terms will be difficult at best.

Giving away equity through the development process, that's crazy talk. Let's say your contract specifies it is done by the number of commits? Great! I'll gain a 50% share of the company within a week, maybe within a day depending on bandwidth. Or maybe your contract specifies it is by lines of code submitted? Again, I can easily gain a controlling share of the company with some simple code generation scripts. Then you can pitty the designers who spend their time working on documents and physical/paper prototypes rather than submitting code, they'll never get any equity. Any system that dilutes equity through the development process means that now matter how important and critical one person's work is, someone else can trivially commandeer that value to themselves.

If you've already got a bunch of development by several contributors, one of the easier ways to correct it is to have everyone agree on a distribution at the present time and assign equity shares based on that. The shareholders become the executive board. Then in the agreement have all distribution of funds be discretionary in a manner approved by the board.

Run it like a business, or not at all. If you don't then you need to get unanimous consensus from everyone who ever contributed. That may mean tracking people down from the corners of the earth. Assuming your project lasts an extended time people will move, people will die and their assets get split among their survivors. When you want to make a decision do you REALLY want to be obligated track down all six of Bob's surviving children and get their approval? Or track down people around the globe to give them their $0.13 share of each product sale?

I would offer to close deals with the others where you either lower your profits' cuts to regain equity, or the other way around.

This risks stagnation otherwise.

So are you in for the project, or for the money?

I should clarify. The 3 core team members will control all equity in the company, and that will still be vested. We are the ones making business decisions on how to best commercialize our work.

We do work with a small network of contractors when the project calls for it, but all intellectual property will be assigned to the company. They do get a cut of the profits generated from the projects they are involved with.

My original question was mostly to answer how the core team should split the equity.