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One Way To Divide Your Company Equity At Start Up

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
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. Below is a screen shot of the spreadsheet:

Algorithmic Method of Dividing Company Equity
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
Make It Big In Games
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Photo by Igkiii

  • http://www.shapesandlines.com -Todd

    Great post Jeff! Good advice on a subject that every indi developer has to confront at some point.

  • Novack

    Very good! yes, definitively interested on read more on this topic, your experience is precious!

  • Novack

    Very good! yes, definitively interested on read more on this topic, your experience is precious!

    And also thanks for the spreadsheet btw.

  • http://www.garagegames.com/account/profile/44571 Mich

    Very good post. This is the kind of information they did not teach at my school, and it is definitely a weak area for me. It's very useful to hear this from someone who has been there and back (and there again) =)

  • AndySchatz

    I've made similar spreadsheets, but for dividing royalties amongst employees and contractors. I decide on a budget, then I lay down percentage of the work of the total project for each contributor (adjusted for market value of that work). That turns into my contracting budget and also a somewhat fair royalty value if the person is willing to work for royalties rather than an up front payment.

    • http://ericzoo.com ericzoo

      i found it hard to estimate percentage of work on projects. Is programming more than art creation? what if code libraries were used? how would you weigh marketing and research?

      • AndySchatz

        depends on the project of course, but I estimate man hours, and then I multiply my the market value of that work. Code goes for about double art.

    • http://www.makeitbigingames.com Jeff Tunnell

      Yeah, this method works for royalties, too. We used a similar method of dividing royalties at GarageGames.

  • http://ericzoo.com ericzoo

    Perhaps an explanation on the google doc would be nice. Keep em coming!

  • http://portalizer.co.cc w2n

    great…

  • http://www.thestillofthenightcausesastorminthemind.com Jeremy Alessi

    Yes! This is essential stuff, I'd love to see more. In addition if you write a book I'll buy 5 copies and make people read it like I did with Game Over ;)

    • http://www.makeitbigingames.com Jeff Tunnell

      If I write a book, I’ll give you a copy! I still want to compile a bunch of my articles, add come connecting tissue and release it as a free eBook.

  • EricPreisz

    This is also good advice when several indies are working together for a project. Set up a teaming agreement ( sample-> http://www.attny.com/team24.html ) when the relationship begins.

    If the people you are working with are as reasonable as you, then your agreement can be less detailed. If you have any reservations, put down every detail possible on paper for reference later. Being proactive avoids the likelihood of needing a lawyer. Lawyers are the only ones who win in civil court.

    I always want something on paper. I'm surprised by how often I forget the exact deals we agreed on 6 months into the project.

    • http://www.makeitbigingames.com Jeff Tunnell

      Nice link on the teaming agreement. It is great to collect a storehouse of agreements like this that can be used as placeholders until your own attorney is brought in.

  • EricPreisz

    Sorry..double post. Not sure if I can delete this or not.

  • http://www.toadtrip.com Wes

    Very interesting. I am in the midst of a start-up, so the insight is appreciated.

  • http://www.redthumbgames.com joshuadallman

    Great blog topic, I actually read one very similar about a month ago, though cannot find the link for the life of me. The author of the other blog took the controversial viewpoint that no, not everyone in the startup is equal, your lead entrepreneur should have a higher percent than say a marketing person, and he submitted an equation to figure out a non-scientific but nonetheless quantitative way to split up the pie fairly – like yours, though based on role, not wage (though wage is tied to role). If anyone knows the blog I'm referring to please post it here, though I'd like to at least back the concept behind it. Splitting the pie evenly is simple, but unless you've got true founding partners, it likely isn't the best way to do it.

    • http://www.makeitbigingames.com Jeff Tunnell

      I read that article too, but I don't have the link. The writer gave extra equity to the person that came up with the business plan, the person that loses the most sleep if the company is not doing well, etc. The “Intangibles” column in my spread sheet is to cover things like that.

  • moiremusic

    Are we to assume that the “sweat equity” mentioned in the article is the same value as the “Sweat Invest.” in the document?

    • http://www.makeitbigingames.com Jeff Tunnell

      Yes.

  • jgostylo

    Jeff, I like the way you divide the project up algorithmically. Very intuitive. I think that your particular level of professionalism with your game product is a little outside the scope of anything I would be part of right now.

    So far when dealing with a project that involves multiple people I have always gone with the approach that you just divide things equally. My viewpoint is that at my level I won't be gaining much by getting a bigger slice and stand to lose the interest of my partners. Also, if I learn nothing from my work and this current project will be the best I will ever do, I never deserved more than equal share because the success was a fluke.

    Since my funding is always $0 I like to reserve 50% of the equity for the budget which is only payable by team members. If we have to spend $1500, I don't want to be the one contributing all of it. I want to make sure it is worth everyone's while to pitch in financially. If I do have to contribute it all then I will be glad to take the lion's share of the profits.

    I think the biggest thing that needs to be agreed upon is what happens when a partner bails on the project and when can partners kick each other out for non-contribution as unfunded projects tend to run into that a lot.

    • http://www.makeitbigingames.com Jeff Tunnell

      Having a partner bail is the reason for my “you get nothing if you leave within two years” clause. This clause deserves and entire article, and I have some personal stories to tell.

  • http://www.gnometech.com David Wyand

    Excellent article, Jeff. An open discussion on dividing equity is exactly what a number of indies are looking for, me included. Seeing what you've put together adds a lot of validity to my own thoughts. Thanks!

    I would be interested in reading more about the finer points that are often overlooked in more general articles.

    • http://www.makeitbigingames.com Jeff Tunnell

      Hey Dave! Nice to see you out here. Judging from the great response to this article, I'll surely be writing more about these sorts of issues.

  • robert aste

    Is partner 2 trustworthy? Smart to keep the goddam lawyers out of it.

  • EricPreisz

    You missed the silent partner – the government.

    • http://www.makeitbigingames.com Jeff Tunnell

      Heh, nice catch!

  • http://www.greyaliengames.com Jake Birkett

    “Sweat Investment”, I like that. I set up a company with two other guys a couple of years back and initially it was equal equity but I ended up doing most of the work so I renegotiated the equity based on that. I kept logs of my time so they couldn't really argue, but they know I'd put in the most as well.

    One other interesting factor is Skill Equity, what if the tasks you are doing are the ones that require the most skill? i.e. accounts, website programming, and the others are making the tea and doing the post etc. Well again you may need to adjust the equity to take that into account. Sometimes you think you'll all be using equal skills but it doesn't always turn out that way.

    • jgostylo

      I think that is where Jeff got it right by putting a person's market wage in the calculation. It needs to consider both what they could be making as well as the skills they will be using for the project. An installers expert usually gets paid pretty well but if that person is just going to put in his time testing the game it should be based on what they are doing.

      On the other hand, I am working on a project where I am TRYING to put in the most effort because the other guy is doing stuff way beyond my level of experience and if that fell on my shoulders there is a chance the project would have to be abandoned.

      • http://www.greyaliengames.com Jake Birkett

        Yes the Market wage idea is a good idea for sure to address that issue.

  • Joe

    Approached by some people who told me an idea and wanted me to create a formula for this idea, in exchange for equity in a company that is about to start up. Now the only product that we would have is the one that I’m creating. But I don’t how much a percentage would be too large or too small.

    I need help asap.

  • Quadsomy21

    Have questions for y'all about valuating the company for first round investors considering a 4 year period, given that the studio has only been running for a few months (team with individual track records but un-proven as a new group with a new IP):

    1. Value the team at a low-ball 100k a head?
    2. Value the Company at $1M for the name and contacts?
    3. Value the IP at a cumulative, expected publisher net (since we would own the IP), with a modest 300k sales projection for the first title, followed by a modest 400k sales projection for following titles on same IP? Or, better to value at Gross? Not cumulative, rather last sale? ??

    Thoughts?

    Thanks,

    Dan

    • http://www.makeitbigingames.com Jeff Tunnell

      Are you a publisher or a developer? A 300K units sales projection is very, very far from modest. I am not a fan of taking investor money for starting a development company. How are you planning on paying your investors back? If you are going to take investor many, why not just sign with a publisher? They understand the risks. Most investors do not. If you take investor money, you no longer own your company, so you are not really Indie. You owe it to the investors to pay back the money at a great return since this is such a risky business. I simply do not think anybody in this business can make those kinds of promises.

  • Quadsomy21

    Hi Jeff,

    Thanks for the response.

    We are a developer. By modest sales projections, do you mean high or low? Sure, anyone can say it, but by even the shrewdest of assessments for this type of game and development team, 300k is comically low. I suppose we could be even more generous and valuate for 150k units sold? Keep in mind, I have done products for PS2 with both critical acclaim and commercial success (awards / over 1M units sold) so I'm not just tossing notions in to the air here.

    I have seen too many good studios ruined by publishers, given that the publishers are the only ones holding the purse strings. I much prefer a model like High Voltage, where the developer can retain their IP and drive a solid deal with the publisher. Further, would like to make a proper game to match the new landscape of gaming, but where the publisher is much slower (and more cautious) and is only willing to put down a low amount to make a quality title (under-fund the project and hope for the best) with “risky” innovation.

    Investors will be paid back through royalties. The risk will be made quite clear up front (you could loose it all!). IMV, “independent” means not wholly reliant on game publishers, and where I retain 51% ownership.

    Imagine all the studios and products that we know and love, that would NOT exist, had they all depended solely on movie studios and game publishers… As you know, the risk is part of what drives early stage investors, as the rewards tend to be higher, if achieved.


    Happy to talk further on this, but would love to hear thoughts on valuation.

  • http://hatchlinggames.net Tathar

    I actually have to disagree with a lot of this. Unless you really want everyone but you (unless you're doing more than design, and you still don't own everything) to have copyright interest in part of the company's games (I can't imagine that you would) you need to have at least a contract that says it's “work for hire” for independent contractors, or have everyone as employees with all of the taxes and expenses as a result.

    I'm no lawyer myself, but I'd much rather have that piece of paper to prove I hold copyright over my team's work in case I need to use those copyright protections for any reason. Since you can get registered copyright in the US for $35 now if you do it online, it's very inexpensive to get some very good benefits, including having your attorney's fees paid for you if you win a lawsuit over your registered copyright. However, you have to actually own the copyright to whatever you're registering. I don't know much about the validity of their contracts, but LegalZoom offers a lot of relevant contracts about these things for $15 or very close to it.

    • http://www.makeitbigingames.com Jeff Tunnell

      This article is about how to divide ownership of your company, not your product. Those are two very distinct and different issues. Usually, the company owns the copyright on the projects that it funds and develops.

  • Quadsomy21

    Hi Jeff,

    Just did the company divide, and the next step (in some cases / my case) is the stock value price for investors… hence, thought folks here might have that followup. Seems maybe no…

  • sivam

    yo man.. this is nice.. you better write and ebook, so that more and more people read it and if you need any help in viral marketing, just tell me ;)
    land loan

  • http://mygames.com/ kathleen

    my i see games that i could play?