While I have always advocated offensive goals such as getting better at your craft, finding a team of like minded people, shipping a portfolio of innovative games, and not worrying too much about defensive details such as contracts, NDA’s, company structure, etc. many people are still concerned with these issues. Since Push Button Labs recently went through getting our company set up, I thought I would give you just one example of how to get through some of these issues and explain how we did it.
Dividing Company Equity Is Not As Easy As Cutting Pizza
Before we get started, I have to give the big IANAL (I am not a lawyer) disclaimer, but I have been through a bunch of company start ups, so I have some experience here. Lawyers are going to be a big reach for any unfunded Indie developer. My take on all of this is to make sure you have a great honest relationship with the people you are working with. Once you have that, completely discuss everything as clearly and honestly as you can, then put down your agreements in plain terms (I’ll give some examples below), then once you get some traction, you can make things official later. This is the way Damon Slye and I did it for Dynamix. We didn’t have attorney drawn up papers for years, and once we got bigger we still went back to our original personally written documents if we had questions. In other words, you need to have partners you can trust and if you don’t, no amount of legalese or contracts can make things work. Partners have to want to make things work with each other.
Once you have found partners you want to work with, the next big decision is how much equity each partner gets. If you have never done it before, this is a tricky subject. How do you even bring it up? How do you put a value on human relationships? How can you say one person is more valuable than another? Well, I can tell you it is difficult, but it must be done. This is a negotiation issue, and if it is not taken care of at the start of your company, it can fester, causing you to eventually lose your best people.
In two of my previous start ups, Dynamix, and GarageGames, we simply winged it, giving the all of the original partners the same equity, and then negotiated new equity when new shareholders were brought in. Other than the negotiations for new shareholders, this simple division of the equity for original “partners” is the easiest, least conflicted way to go. In both of those cases, things worked out for all of us, and I am glad we did it that way.
In many cases, however, simple division of the equity is not appropriate. For Push Button Labs I devised an algorithmic method of dividing the equity, and so far I am pretty happy with the method and the results. Simply put it goes like this: everybody in the company works for less than “industry standard wages” and that “sweat equity” over a two year period is their contribution to the company. All of the sweat equity and real money investments go into a spreadsheet and the percentage of the company that each individual gets is automatically determined. Here is a link to a Google Docs spreadsheet that we used at PBL. Disclaimer: I have never publicly published anything on Google Docs, so let me know if there are any problems. Below is a screen shot of the spreadsheet:
Algorithmic Method of Dividing Company Equity
Below are examples of some of the simple, personal agreements that work better in plainly worded documents:
- Stock options vest over four years, no payback if employee leaves prior to two years.
- Angel equity is subject to a standard (TBD) equity deal.
- If employee leaves after two years, earned equity converts to a loan payable over (N) years, starting on (N)th company anniversary.
Any one of the above fine points of creating a start up company have article potential, but putting them all in an article would turn it into a book. If MBG readers are interested, I would be happy to cover more of these issues. Let me know in the comments and MBG forums.
-Jeff Tunnell, Game Maker
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