Demystifying the Contract
We recently signed our first board game (working title SIGIL by Andreas Voellmer)! So, I’ve been through the process of learning a bit about contract terms, different types of contracts, and what is important.
I am not a lawyer. This is not legal advice. This is just my layman’s understanding, and some insight into what we thought was important and why we wrote it into our contract.
Balance by Mark Poole for Magic the Gathering
If you’re entering into a contract, make sure to seek legal advice from a qualified professional. I’ve had a great experience with our lawyer - Zack Strebeck - who focuses on video game and board game contracts and intellectual property. If you can’t afford a lawyer, there are some free legal resources for the arts like Volunteer Lawyers for the Arts.
Why have a Contract?
I wrote a little about this in a previous post: Basic Legal Best Practices. But, the long short of it is that contracts have two main functions:
Contracts define the terms and structure of a relationship. They clearly define responsibilities, compensation, and remedies. This promotes a better working relationship in that everyone knows their role and can execute on their deliverables without concern for ancillary tasks or out of scope asks.
Contracts protect both parties. We live in an imperfect world and sometimes things go wrong. Whether it’s a mistake, miscommunication, or bad actors, contracts protect all parties and clearly lay out remedies.
Transferring Rights
There are three primary ways to transfer intellectual property rights:
Work for Hire: Isn’t actually a transfer of IP. One party does work for another party, and the resulting work product is the property of the hiring party. This type of arrangement could be in the form of contracting an outside designer to work on a project. The project remains the publisher’s IP, and the outside designer is paid fees for their services (or even hourly).
Sale of Intellectual Property: A designer can sell all of the rights associated with a property to a publisher. This would result in an upfront payment, but no ongoing royalties. My understanding is that this is less common in the board game industry.
Licensing Agreement: In a licensing agreement a designer sells the rights to publish their game within certain parameters. This includes a term, various conditions, reversion rights, and royalties. This is the most common form of transferring IP as an independent designer and is the structure of our contract for SIGIL.
For the rest of this article, we’ll focus only on game licensing agreements and their terms. For a nice overview of what is typical, I recommend checking out Cardboard Edison’s survey infographics.
Terms of a Game Licensing Agreement
License Grant: The heart of a licensing agreement is what rights are being transferred from the designer to the publisher. This should include exclusive rights to development, localization, production, manufacture, advertising, promotion, distribution, and sale. It should cover physical and digital versions, as well as sublicensing rights. In most instances, the license grant should apply globally.
Term: Our licensing agreement is in perpetuity, however there are conditions under which the rights will revert back to the designer. These are called reversion rights, and we’ll get to them later. Because of the work and capital involved in publishing a game, I can’t think of a circumstance where we would license a new game not in perpetuity. If we were licensing distribution rights, or localized publishing rights, for a game that already exists, that would be a different story – but for an unpublished game, you should expect the term to be perpetual.
Compensation: In exchange for the rights to publish a game, the designer earns compensation. This will be in the form of an advance, and royalties.
Treasure by Alayna Danner for Magic the Gathering
Advance: An advance is a lump sum of money paid upfront to the designer. When a game hits the market, the advance must be earned out. Only 56% of game licensing contracts have advances, with the vast majority in the $1,000-$2,000 range. I think advances are an important element of the licensing agreement, as it puts publisher skin in the game on day one.
Royalty Definitions
Royalties are a fee schedule paid to the designer based on revenue, profit, or units sold. There are several types of royalty.
Fixed amount per unit: A set dollar royalty based on either units printed or sold is a less common royalty structure in game design, but more common in other types of publishing (like books). Sometimes the royalty will vary based on channel, or scale with units.
% of Wholesale Price: Basing the royalty off of wholesale price is a relatively clean method for calculating royalties. Unlike a fixed amount per unit, it protects the designer from inflation.
% of MSRP: This is essentially equivalent to basing the royalty off of wholesale price. The Royalty % will be lower if based off of MSRP, but either way the designer is getting the same fee regardless of what channel the publisher sells a game through.
% of Unit Sale Price: This royalty pays the designer a percentage of revenue – which means that the designer benefits along with the publisher for wider margin distribution channels. % of unit sale price royalties can either be based on gross revenue, or a modified revenue calculation. In accounting, Net Revenue would net out direct expenses and Cost of Goods Sold. More common in a licensing agreement would be a Net Unit Sale Price calculation that will only net out contra-revenue such as processing fees, and shipping subsidization.
% of Net Profit: Some contracts pay the designer a percentage of net profits. There is some appeal to the structure in that both party’s interests are aligned, and a publisher has some offsetting benefit if their to market expenses are too high. This split relies on detailed book-keeping and accurate (unbiased) expense allocation among projects.
Scaling versus fixed: Some royalty structures will scale based on units sold, most remain flat.
Digital & ancillary products: Royalty agreements should have language defining the structure and amount of royalty on digital games, as well as ancillary products. These structures can be the same as the game royalty or follow a different structure.
Sublicensing: The licensing agreement should have a royalty on sublicensed revenue. This will cover areas like licensing the game for foreign localization distribution.
Closing thoughts on royalty definitions: The most important point is to make sure you understand what your royalty is based on, and what is netted out of the calculation. Also, try and understand what that means for how you’ll be compensated based on sales channels, and margins at the publisher.
Royalty %: Each separately defined royalty will have an associated flat fee or percent. The royalty percent will be determined by a number of factors:
Channel: A royalty based on wholesale price will be lower % than a royalty based on MSRP (this is because MSRP is higher than wholesale price). Similarly, a royalty based on net profit will be a much higher % than other channels.
Publisher: A large publisher with massive distribution will offer lower per unit royalties than smaller or mid-sized publishers. A game with big box distribution through their publisher will on average sell more units than a game from a small publisher that is only direct to consumer.
Designer: Established designers who will drive sales for their game can demand higher royalty rates.
Average royalties are 5-8% of wholesale price, and skew lower for unit sale price or MSRP.
Payment Schedule: Most royalties are paid quarterly, although other schedules (monthly, semi-annually, or annually) aren’t unheard of.
How we structured our royalties & why
I gave Andy (our designer) the option of a royalty % based on wholesale price, or a slightly lower % royalty based on net unit sales price. I am happy he chose net unit sales price, as it aligns our interests the best.
In the calculation we’re netting out processing fees, and any shipping subsidy that we pay out of pocket. The reason I wanted to net out shipping is that I don’t want us to have weird uneconomic incentives like not offering free shipping on direct-to-consumer sales.
We’re not a digital games company, so if we do branch into digital games, us taking on the capital risk, and then splitting profits 30/70 seemed fair. Similarly for sublicensing, since we won’t have direct expenses, but will have already developed and promoted the game, a 30/70 split seemed appropriate.
Design & Manufacture
A major part of a contract is defining the obligations and rights that each party has. The contract will outline who burdens what costs, whether the designer is credited, and whether the designer gets free copies of the game. Some of the most important elements are:
Costs: The designer is absolved of all costs relating to design, manufacture, and sublicensing.
Decision-Making: The publisher has the final decision-making power over all aspects of the design, development, manufacture, illustration, and publication.
Obligation to Publish: The publisher is under no obligation to publish or continue to publish the game.
In my (non-lawyer) opinion, all of these are important to operating our business. The publisher (who is putting their capital and company at stake), needs the flexibility to change the game as they see fit, and the freedom to cease publication if it becomes uneconomic (which is also why there are reversion clauses, that we’ll get to later). The designer needs to be protected from liens and obligations.
Ownership
The contract should address ownership of the licensed material, as well as trademarks, and material produced during the development of the game.
Generally, the designer retains all claims to the licensed material, other than what is explicitly transferred in the licensing agreement. All other intellectual property, trademarks, illustration, design elements will be the property of the publisher.
Representations & Non-Infringement
Both parties must represent that they have the right and authority to the agreement. Most importantly is the non-infringement clause where the designer represents that the intellectual property they are licensing to the publisher does not infringe on anyone else’s intellectual property.
Confidentiality & Non-Disclosure Agreements
During the course of development, a designer might become privy to information that is non-public. In some cases, information that the publisher is not at liberty to disclose (like third party agreements). Therefore, contracts should have a non-disclosure agreement (NDA).
In our case, we wanted to carve out the NDA so that it would be as narrow as possible, and give our design partners the freedom to talk about the process, and their experience working with us.
We had Zack draft up the contract so that Andy is essentially only restricted in talking about a couple of topics:
Details relating to suppliers, contractors, and other third parties.
Information relating to licensed games that have not been publicly disclosed.
The reason for the second carve out is to protect ourselves from product leaks and ensure that we can build a release schedule to maximum impact.
Non-Disparagement
A non-disparagement agreement prevents the designer from making public comments which cast the publisher in a negative light and negatively impact the publisher’s ability to market and sell their products.
Town Gossipmonger by John Stanko for Magic the Gathering
I am on the fence as to whether non-disparagement agreements should be standard in contracts in our industry. Libel laws protect publishers from demonstrably false claims. But, those protections only go so far, and might be difficult to prove.
In general, I believe that we should have more open discourse – which is why I’m writing this article. But, as a publisher we are making large capital and time investments into each project and need to protect ourselves in the unfortunate event of a relationship going sour.
I’ve been informed that most designers are on board with non-disparagement agreements, and we do have one in our contract with Andy, but this is the one element of the contract that I am not sure we made the right call.
My intuition is that if we are a bad actor, that reputation will get out regardless of a non-disparagement agreement, and besides we are giving our design partners plenty of contractual recourse in the event that we are bad actors.
Reversion Rights & Audit
This part of the contract was very important to me – we are a games publishing company, not an IP holding company, and I wanted to ensure that rights would revert to Andy if we failed to publish or ceased publication of the game. Rights revert under several circumstances:
Failure to publish within a timeframe.
Failure to pay royalties.
Violating and failing to remedy any material conditions of the agreement.
Ceasing to offer the game for sale.
Audit Clause: Make sure that any licensing contract you sign has an audit clause. This allows the designer to audit our books (relating to their property) and ensures that they can verify proper royalties.
Closing Thoughts
Every contract will be different, and what is important and appropriate to each designer and publisher will vary on a case-by-case basis. If something is important to you, you can make sure that it’s written into your contracts, be it a diversity requirement, discounted copies, or creative input.
I wanted to start the conversation on contracts and hopefully by sharing what we chose to put in our first game licensing agreement we can provide a bit more transparency, and help newer designers understand what is being put in front of them, and whether it is a standard agreement.
And, at the end of the day, when in doubt, ask a lawyer.
What non-standard contract terms are important to you as a designer?
