"Famous Last Words"

Will Code For Royalties (January 2006)

Dear Jim:

I'm currently planning to start up a software development shop in Texas and have a team of guys ready to assist my development. At the time, the business is completely self-funded and everyone will be working under the assumption of future compensation through royalties.

I need to know the following:

• What do I need to do to protect myself? Do I need all the members to sign a specific contract stating that they will work designated hours with a % of royalties in mind?
• Are there any other potential Texas based labor laws that I need to be aware of?

Dear Team Leader:

The first thing we need to sort out is whether you are the owner of this new venture, or whether it is a company in which ownership is shared by all members of your start-up team.

1. If you are the owner, you will need to organize your business (incorporate or set up an LLC, initially and most conveniently in Texas). The next step is to ask each of your “employees” to sign a typical employee's agreement that provides for at least two things: the company's ownership of all work product, and an agreement to maintain the secrecy of confidential information of the company.

There are good reasons for this.

The company must own the game.

Under United States law, copyright protection subsists in original works of authorship as soon as they are fixed in any tangible medium of expression. This means that as soon as any person creates any work on a computer, note pad, or tablet, or in any other tangible medium of expression, he or she has created a copyrighted work that he or she owns.

These copyrights must be transferred to the company.

Under a copyright doctrine known as “work-for-hire,” if someone is an employee and creates the work in the ordinary course of his or her employment, ownership vests in the employer. However, here, where your team members may not be on staff, paid a salary, or really have any sort of employee status, the best strategy would be for each to sign an agreement in which their work product is assigned (transferred) to the company. The agreement should describe the work as “work-for-hire specially ordered or commissioned for use as a contribution to an audiovisual work.” Without such a written agreement, the company may find it does not own the work.

In the same document, you may also want each person to recognize and preserve the confidentiality of company information. The ideas, designs, tools, milestones, and other work product you develop are the property of the new company. This is what gives the venture value. It is important for each person to agree in writing not to disclose or use for his or her own benefit the company's proprietary information.

This sort of agreement to maintain the confidentiality of company material is also an essential step (though not the only step) in protecting these assets as trade secrets.

As the owner, there will certainly be other requirements for you to follow. If you hire your team to work on the game, there may be issues of minimum wages, withholding, workers compensation insurance, and other minimum requirements for an employer in Texas.

2. If you are not the owner, if ownership is to be shared among your start-up team members, whether or not you are all ready to organize a separate business entity (corporation or LLC), you may want to consider preparing a collaboration agreement to be signed by all participants.

Such an agreement could describe the goals of the project, the responsibilities of each participant, ownership of the combined work, the share of the project royalties or other compensation/income to which each participant would be entitled, and the disposition of the interests of any member if he or she is no longer part of the group.

The collaboration agreement should also contain the confidentiality provisions discussed above.

In the beginning, the biggest assets of the project may be the design and the name. Be sure there is a clear agreement as to who has what interests in these. If your group breaks-up before the project is realized, who has the right to move it forward? What interests do each person retain whether or not he or she continues?

All of these issues are best settled in a collaboration agreement among the participants.

3. The question of whether to include hours and royalty percentages in your participant agreements, as well as further labor law issues that must be considered, are best left to a Texas lawyer familiar with Texas law.

There may well be difficulties in providing for a required number of work hours with no compensation. Each state has its own wrinkle on wage and hours laws.