"Famous Last Words"

Making the Deal with Your Agent - Part II (April 2008)

Dear Jim:

We were approached by a games agent who wants to represent our studio. Any suggestions for how we should proceed?

Looking for Projects

Dear Looking:

Last month we began to explore issues to consider when selecting an agent. This month, we'll look at terms that may become part of your agent-developer deal.

1. Term. This is the length of time in which the agent will represent you.

In Hollywood , even though they say a star is “signed” with an agent, there is often no written contract between them. If your agent insists on a contract (and nearly all games industry agents do so), be careful about signing up for a long term. All agent contracts are exclusive, meaning that the agent is your ONLY agent. If the agent is not performing, if the agent is not successful in find projects for your studio, if the agent reveals qualities that make you uncomfortable, you may not be able to fire him or her and go elsewhere.

One approach to this is to provide for a short initial term (say 180 days to one year); then give the agent an option to continue if certain performance metrics are met. There is no standard approach to this – let your circumstances determine how it is handled -- but one example could be –

“The term of this agreement is one year; provided, however, that if during the term Agent brings game development opportunities to Studio that result in aggregate cash flow to Studio of at least $XXXXXXX, then agent may extend the term by notice to Studio for a further period of one year.”

I recommend short term milestones for agent's performance – just like game dev agreements have milestones for developers. If the agent is not performing, if there are no results despite how much effort is being expended, it is not fair to the studio to be prohibited from looking elsewhere for agency services – or from recapturing the task and taking it in-house.

2. Key Man. Just like your game development agreements provide for the leads and key development personnel to be named and remain on the project, you may want your agent agreement to name the people who will have primary responsibility for your studio. All should be subject to your approval. We are in a relationship business, and your relationship with your agent is very important. One person should be primarily responsible for your studio; there should be one person you are always able to contact; one person on the agency side responsible to you and your account. Like your producer at your publisher, the agent may want to be able to replace that person. You must decide how comfortable you can be with that. If the person can be replaced, you will want some right to interview and approve the replacement. I do not believe in arranged marriages in the games business.

3. Compensation. Agents are paid a commission based on the cash flow they bring their clients. (This is known in some quarters as “you eat what you kill”.) Agent's performance-based compensation, with no guarantees or minimums is common across all segments of the entertainment industry. In Hollywood , in the book and record businesses, and performing talent booking, the historical agent commission level is ten percent (10%). In professional sports, where the contract numbers can be huge, and there is fierce competition among agents, that number is much lower – perhaps as low as 2%-3% for a mega contract.

But what is the right number for a game agent's commission? In this regard, game agents are all over the lot. Many factors must go into figuring a fair commission level. This starts from an understanding of the services being provided, and the calculation of what amount can be paid so there is enough left in the advance to pay for all development work.

When an agent gets an actor a movie, the actor realizes a very high gross profit on the deal. If John Stewart were to be paid $1 million to host the Oscars, his costs to provide these services are very low. The program producer pays for the limos, hotel suites, dressing room, writers, production, etc. 10% to the agent does not place a financial hardship on Stewart's ability to perform.

But in game development, gross profit is very low. Much, if not all, the advance is expected to be spent developing the game! Some publishers even insist on the right to audit the developer to confirm the development money has, in fact, been spent on game development!

With a very low gross profit, how much can be made available as a commission for the agent?

Five percent (5%) seems to be a commonly accepted number. Some agents, who can provide exceptional levels of service, may demand and deserve more. But no agent is worth a high commission if paying makes it difficult or impossible to finance development from the publisher advance.

4. Sunset Clause. Once you have settled on a commission rate, the next thing to consider is for how long the agent should be paid. If your agent gets you a deal for your original game, and from that deal you create the next Sims, World of Warcraft, Grand Theft Auto, Halo or Guitar Hero, should you be paying the agent a commission on all income generated from the property forever?

The agent may have gotten the deal; securing for you the opportunity to make the game. But the creativity and innovation that results in your blockbuster innovation, that makes it an evergreen franchise, came from you alone.

The farther you get from when the agent made the deal, the less impact the agent has in the development and continued success of the franchise.

Removing an agent's interest in your work as time goes by is known as a “sunset.” Frequently, sunsets are handled by reducing commission rates over a period of years, starting after the end of the agent's representation.

For example, if an agent's commission is five percent (5%), after the end of the representation, it may be reduced to 4% after two years, 3% after four years, 2% after five years, then zero.

Agents strongly and vocally resist sunsets – they want to be part of a property forever. It can be an annuity in which they want to share. But these negotiated sunset clauses appear more and more frequently in representation agreements. Unless you want your agent to be your partner forever, work to get a sunset in your agency agreement.

5. Additional payments to agent. What if your agent wants additional payments besides their commission? My experience is that this should be strongly resisted. Agents should finance their own operations from their commissions. Under the “eat what you kill” method of compensation, the agent must deliver in order to be paid. The agent may be working for you, but he or she is not an employee, and you have no responsibility to sustain him or her. If the agent asks for a monthly stipend, advisory fee, travel budget, or some sort of contribution to their office overhead, this is not consistent with the practice of established entertainment agents. Extraordinary contributions to expenses may be considered on a case-by-case basis – for example, if you ask the agent to attend a program or a meeting in a distant location. But as an ongoing obligation, the client should not be paying the agent for anything except commissions.

6. Extraordinary Services. Some agents want to commission any transaction where a client studio may be sold or investment capital brought in the door. Before agreeing to this in your developer – agent agreement, or accepting any introduction to investors or potential investors from your agent, ask local counsel to consider whether such service violates United States (or your home jurisdiction) securities laws. Is the agent qualified to provide such services? The last thing any studio needs is to run afoul with federal law because its agent took it upon himself or herself to act in the capacity of investment banker or unregistered broker-dealer. Securities regulation is a complex field best left to experts. But if this situation were to rise, be sure to find an expert in your community.