"Famous Last Words"

Focus on the Details in Start-Up (February 2005)

Dear Jim,

We're four guys who want to start a studio. We know the odds are pretty long against our ever selling a game. But we are all gamers, love coding and want to give it a go. Any suggestions?

Four Guys Named Mo'Games

Dear Moe:

Welcome to the industry! The hours are long, the competition is tough, but the rewards can be great.

I can't help you on the creative or technical side, but here's a few general suggestions for your business:

1. Find a local lawyer who is familiar with business law in your state. Everything I I will discuss is controlled by state laws that may have nuances that are important to you. My discussion here is limited to general principals that may or may not fully apply to you in your state (or country!).
2. Decide what type of business entity you want to be, then follow-through with all the detail. Corporations and limited liability companies may shield you and your partners from personal liability, but you need to nurture them and make sure all the requirements are met. It's not enough to file the papers and forget about it.
3. If you are a corporation, you must hold organizational meetings, or sign organizational consent resolutions, adopt bylaws, issue stock, elect officers, and open a corporate bank account. Be sure to observe the requirements regarding annual meetings of shareholders and the board of directors. Take minutes at all corporate meetings. You may also want to consider a shareholders agreement that sets forth a system for the company to reacquire stock from any departing shareholder, and restricts the right of any shareholder to sell or give away his or her shares to anyone but the company. The last thing you want as a small owner-operated business is silent partners; particularly when they could be someone you do not know. Never forget the worst case scenario – the co-founder you trust loses their shares in a late night poker game – or even worse, to their ex-spouse in a messy divorce.
4. If you become a limited liability company, you must prepare and adopt an operating agreement. This is the rough equivalent of the corporate bylaws. Generally, there are fewer formalities required to operate an LLC.
5. The bylaws, operating agreement, and shareholder agreement documents establish the playing field and rules under which your organization will operate. When you run into problems, this is where everyone will look for guidance. A big part of what your local lawyer should do in helping you get started is to watch out for the future when your relationships may become contentious. He or she can't prevent that – but what he or she can do is help provide a process in which those disputes can be resolved at a reduced risk to the continuation of the company.
6. If you never get around to incorporating or becoming an LLC, there is a risk of personal liability for the debts or liabilities of the company.
7. In this case, where there are four of you involved, you may be treated as a general partnership. Under general principals of partnership law, unless there is a written partnership agreement setting forth the relative interests of each partner, you would all be considered equals. Each partner is entitled to an equal share of the profits and losses without consideration of the relative workload or responsibilities of each partner. And each partner has the full power to legally obligate the partnership to agreements made by the partner whether or not approved by the partnership. Withdrawal of any partner results in the termination of the partnership. If you do decide you want a partnership, even with the danger of personal liability, be sure there is a written partnership agreement.
8. Once you have established your business entity, I recommend you enter into a basic employment agreement with each principal. The primary reason for this is to assure that work product developed by each participant is the property of the business entity, and not the individual. These employment agreements can be limited to basics, assignment of IP rights to work product and a confidentiality clause. I will presume for the moment, there is no money to pay salaries. But it is important to realize that simply because someone is a partner or a shareholder in a venture does not necessarily give the venture rights to work product developed by the individual. Under U.S. copyright law, copyright vests in the creator of a work from the moment it is set in a tangible form of expression. If someone is an employee and the work product is created in the normal course of his or her responsibilities, ownership goes to the employer. But here, where there is no employment relationship, only a partnership or equity participation, it is not clear that ownership would transfer to the entity. The copyright law requires a writing in order for ownership to be transferred. A brief employment agreement can provide for that.

Taking care of these details now should provide for smoother operation of your new venture.