Crash Course in Building Your Indie Game Studio | Quoc Tran

Building and Growing Your Game Business

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I made too much money

• Closed previous startup because we made too much money• Work-for-hire firm saving up money from contracts• Cut contracts and focus on internal product development

Key mistakes

• Stopped taking owner’s draw - no salary to owners• Still got taxed on revenue!!!• Would have been better off spending money instead of saving

Never again

• Mission - make sure this didn’t happen to other startups• Quoc Tran’s background - technical director• Frank Coppersmith’s background - COO and CFO

Today’s goals

• Intended audience: experienced game developers interested in entrepreneurship• Basics of company formation and operations

Topics

• Legal• Financial• Team• Corporate Insurance• Contracts• Taxes

Legal

• Legal structure• Registered agent• Trademarks

Legal - Legal Structure

• Sole proprietorship• Partnership• Limited Liability Company• Corporation


• Sole proprietorship - pros• Easiest to run for a business with a single owner


• Sole proprietorship - pros• Easiest to run for a business with a single owner

• Sole proprietorship - cons• Owner is personally liable


• Partnership - pros• Easiest to run for a business with multiple owners


• Partnership - pros• Easiest to run for a business with multiple owners

• Partnership - cons• Both partners are personally liable


• LLC - pros• Legal protection from liability• Some tax benefits



• Partnership - cons• Formalities and fees• Costs to close



• Partnership - cons• Formalities and fees• Costs to close

• Added bonus• Tax as S-Corp• Save 16-20% in federal taxes each year!


• Corporation - pros• Maximum liability protection• Can issue stock• Can raise money


• Corporation - pros• Maximum liability protection• Can issue stock• Can raise money

• Corporation - cons• Headaches of running a separate business• Shareholder meetings• Separate tax return• Corporate formalities

Legal – Registered Agent

• Receives official notices from state the business is incorporated in• Mandatory• Usually must have physical address in state that business is incorporated in

Legal – Trademarks

• Protects your company name, game, and key game elements like character names• Avoid using similar names within entertainment industry• Search and file online - uspto.gov

Financials

Financials

• First steps• Accounting• Finance

Financials – First Steps

• Separate personal expenses from business expenses• Required if you are a corporation• Good recordkeeping helps defend you during an audit• Manage tax and business bills more efficiently

Financials – Accounting

• All about what happened in the past• How much revenue did I earn?• Where did I spend my cash?


• Bookkeeping - the act of tracking all of the financial information about your business• Tracking and paying bills• Following up with customers• Sending out invoices• Paying contractors


• Bookkeeping - the act of tracking all of the financial information about your business• Tracking and paying bills• Following up with customers• Sending out invoices• Paying contractors

• $50-100/hr for competent bookkeeping services• More if tied into CPA or tax prep firms


• Chart of Accounts• Allocate expenses into categories that let you understand how your business is

performing



performing• Categories help you understand where you are spending money

• Meals• Engineering• Travel



performing• Categories help you understand where you are spending money

• Meals• Engineering• Travel

• Classes let you know which product is costing the most or making the most money• Different games• Different customers


• Revenue• Getting paid is important!• Work-for-hire - how are you invoicing clients?• Product revenue - are you downloading and reconciling reports from platform

providers?


• Cash accounting• Just like your pocketbook• Record revenue when you receive the cash• Record expenses when you make a payment


• Accrual accounting• Necessary for some corporations if you make over $5 million• Necessary if you have inventory


• Accrual accounting• Accounts receivable• When you send an invoice to a client and they have a number of days to pay• Time between invoicing and payment is tracked as an account receivable


• Accrual accounting• Accounts payable• When you receive bills, you may not pay them right away• Net 30 or Net 60 - you have 30 or 60 days to pay before bill is delinquent• Time between bill and payment is tracked as an account payable


• Paying bills• Set up regular cadence of reviewing bills, tracking, and paying them• CHECK RUNS are a good time to check health of business


• Why so much detail?• Amount of detail you put into your financials is up to you• In a perfect world, you will have many games on many platforms


• Why so much detail?• Tracking revenue and expense information in detail

• By game• By platform• By category (e.g. art)


• Why so much detail?• Tracking revenue and expense information in detail

• By game• By platform• By category (e.g. art)

• Insight into:• Which games are most profitable?• Which platforms am I most successful on?• How can I best reduce development costs to increase profitability?

Financials – Finance

• Looking into the future• Finance is all about the future• What’s my budget for 2017?• What’s my return on investment for different kinds of marketing?• How much money do I need to build my next game?


• If you know what’s going on day-to-day in your business, you can start predicting• How things look next month• How things look next year

• Even if you don’t have historical data, having some estimates are critical


• Projections• If you understand your product, you can understand

• How your product will make money• How much it will cost


• Example:• FTP game on Android / iOS that will monetize via virtual goods• Comparable game performance available from many sources• Estimate revenue based on:

• Players• Conversion to paying• ARPPU• Total Revenue


• Example:• Figure out your expected expenses:

• Cost per install (marketing)• Art• Music• Engineering• Design


• Example:• Revenue & Expenses - this is your BUDGET• As each month passes, see how you are performing against expectations• Make smart operational adjustments


• Investment• Bigger projects delivered faster means you’ll need money• Investors are looking for return on their investment• Kickstarter / crowdfunding another option

Team

• Employees• Contractors• Health insurance

Team - Employees

• Recruiting• Job postings and interviews• Plan for what you want to learn about the candidate• Prepare for topics candidates care about

• Salary• Equity• Bonuses• Vacation• PTO• Sick time

Team - Employees

• Recruiting - legal• It’s illegal to discriminate on the basis of:

• Race• Gender• Religion• Age• national origin• Physical• Mental disability

• Don’t say you’re looking for a “young” person to join your staff

Team - Employees

• Recruiting - legal• There are things you are not supposed to ask job candidates

• Are you married?• Do you have kids?

• The only purpose of the info is to discriminate

Team - Employees

• Tax forms and taxes• You will need to fill out tax forms for each new employee• Pay taxes each payroll

• Employers and employees each must pay Social Security and Medicare tax - 7.65%• Employers may also need to pay federal unemployment tax• May need to pay 6% of the first $7000 in wages for each employee

Team - Employees

• Tax forms and taxes• Depending on the amount of payroll tax you pay, you may need to file quarterly or

annual returns• Pay your paytoll taxes on time!• IRS moves very quickly when companies are late on payroll taxes

Team - Employees

• Protect your business just in case• Have employees sign an invention disclosure and assignment agreement• Makes sure that when employees make content for your game, it belongs to you• Non-competes are non-trivial to enforce but may be appropriate for key leadership

personnel• Enforcement of non-compete is tied with theft of trade secrets

Team - Employees

• Payroll• Making sure your employees get paid is the most important job in a small company• Not making payroll is the classic event of collapse of a small business• Use a professional service to make this as simple and automatic as possible

Team - Employees

• Termination• In most states - employment is at will• Make sure departing employees get last paycheck ASAP• Some states require you to give the last paycheck as they leave• Cut off access to systems and remove company property• Employees may have rights to COBRA• Employees may also file for unemployment

Team - Contractors

• Contractors are not employees• They work under a Contract or Consulting Agreement• Paid for deliverables or hours worked• Contractors pay all their own taxes• W-9 form at start, file 1099 each tax year

Team - Contractors

• Contractors can’t be treated same as employees• Otherwise, risk being reclassified by Dept. of Labor as employees• Results in big tax consequences for you

Team - Contractors

• IRS Criteria• Uses your tools, equipment, or materials instead of their own• Receives on-the-job training• Must follow hours you set• Is told not just what must be done but how the work must be done• Hires or supervises your workers• Receives health insurance, sick pay, vacation pay• Gets a regular paycheck

Team - Contractors

• May be beneficial for contractors to incorporate as LLC• Clients do not need to file a 1099• Removes any ambiguity that independent contractor is an employee

Team - Health insurance

• Americans have to have insurance or face a fine under ACA• Employers with less than 50 employees don’t have to provide insurance but

are permitted to

Team - Health insurance

• Types• Health Maintenance Organization• Preferred Provider Organization• Point of Service Plan• High Deductible Health Plan• Disability• Dental and Vision

Corporate Insurance

Corporate Insurance

• Corporate liability• Types

• E&O• D&O• Hired Auto• Non-owned Automobile Coverage

Corporate Insurance - E&O

• Errors and omissions insurance• Essential if you are doing work-for-hire• Protects companies against claims made by clients for inadequate work or

negligent actions• Often covers court costs and settlements for amounts specified on insurance

contract

Corporate Insurance - D&O

• You may add advisors or investors as company grows• D&O is liability insurance payable to directors and officers of a company• Covers losses or defense costs in the event of legal action brought for

wrongful acts in their capacity as directors and officers• Intentionally illegal acts not covered

Corporate Insurance - Hired auto and Non-owner automobile coverage • In event of an accident, protects your company if employee has an accident• Supplements the driver’s own auto liability coverage• If an employee has a serious auto accident while on company business and

their personal insurance is not enough to cover, company be held responsible• Claims can be catastrophic• Cost of insurance is less than $150 / year

Contracts

Contracts

• Leases• Vendors• Work for hire• Contractor• Joint ventures• Publishing

Contracts - Leases

• May make you seem like a “real business”• Big risks

• Often for long periods• Highly restrictive• Contain pages of microprint

Contracts - Leases

• Watch out for:• Restrictions on ability to sublet space in case you need cash• Early termination rights• Amount of “free” improvements you get on signing and move in• Whether landlord can bump you for another client• Covenants that restrict what you can do

• E.g. Covering windows to keep out sunlight interfering with art development

Contracts - Vendors

• Make sure you know who owns the rights• Any restrictions on your ability to further transfer anything you’ve bought• When do you have to pay?• Watch your cash flow

Contracts - Work for hire

• If you are working for someone else, they will likely use their contract paperwork• Most important provisions

• What you have to deliver• When and how• When you’ll get paid

Contracts - Work for hire

• Watch out for warranty provisions for “bug free” code• Who gets ownership of the work?

Contracts - Contractor

• Non-disclosure agreement• Consulting agreement


• Non-disclosure agreement• Non-disclosure obligations• Definition of confidential information• Return / destruction of confidential information• No announcements• Ownership of confidential information


• Consulting agreement• Explanation of services to be provided• When• Compensation• “Independent contractor relationship” - not an employee• Confidential information• Non-disclosure and non-use provisions• Term and termination• No conflicts of insterest• Non-solicitation• Ownership assignment

Contracts – Joint Ventures

• Work with another company to jointly build a product you share• Crazy complex - make sure to get legal advice immediately!

Contracts – Publishing

• Incredibly complex• Crazy complex - make sure to get legal advice immediately!

Contracts – Final Note

• Once you start signing agreements, you are creating on-going costs• These will continue whether the game makes money• Consider the total costs and whether you can terminate a contract early• Consider how much money you have to make to pay the bills

Taxes

• Impact of taxes• EIN• Types of taxes• Deductions

Taxes - Impact of taxes

• Can make the difference between profit and loss• Don’t pay unnecessary taxes - take your deductions• Know if you are paying business taxes as an individual or paying business

taxes separately• Penalties are potentially large for trivial infractions like filing late• Federal and state rules apply BUT terminology is different

Taxes - EIN

• You will need a taxpayer ID number or employer ID number• You can apply for one online

Taxes - Types of Taxes

• Income tax• Estimated taxes• Self-employment taxes• Sales tax• Excise tax• Franchise tax


• Income tax• All businesses must file annual income tax return• Partnerships file an information return• Depends on how business is organized


• Income tax• Federal income tax is pay as you go• Must pay the tax as you earn income during the year• May need to pay estimated tax


• Estimated tax• Must pay taxes on income• May need to pay self-employment tax by making regular payments during the year


• Self-employment taxes• When you have employees, you must cover their:

• SS and medicare taxes• Federal income tax withholding• Federal unemployment tax

• When you are reporting your own revenue for tax purposes, you can deduct the taxes that your employer would otherwise pay


• Sales tax• Certain platform providers cover sales tax, iOS• You must pay the sales tax on revenue from other platforms, Android• Only pay sales tax on sales in the same state as a major nexus

• Nexus - if your company has sufficient physical presence in a state


• Excise tax• Must be paid if you do the following:

• Manufacture or sell certain products• Operate certain kinds of businesses• Use various kinds of equipment, facilities, or products• Receive payment for certain services

• Likely only applies to game developers if you have real money wagering


• Franchise tax and other state fees• Texas has a state franchise tax• This is really just a fee for operating a business in Texas• Other states may have similar fees

Taxes - Deductions

• Home office deductions• Travel• Meals

Taxes - Deductions

• Home office deductions• If you use part of your home for business, you may be able to deduct expenses• Available for homeowners and renters

Taxes - Deductions

• Home office deductions• Requirements

• Regular and exclusive use• Principal place of business

• Based on percentage of home devoted to business use

Taxes - Deductions

• Travel• Commuting expenses not deductible• Side trips to customers or suppliers are deductible• Only covers transportation expenses, not repairs• Allowed deductions for food and lodging only if you are staying away from home (your

place of business) overnight

Taxes - Deductions

• Meals• Regular meals not deductible• Meals with customers are 50% deductible

• Only if business is discussed at meal• Expense is not “lavish or extravagant”

• Must have a receipt and write who you took and why• Tips are 50% deductible• Meals while traveling away from home on business are 50% deductible

Q&A

• Contact us:• [email protected]

Crash Course in Building Your Indie Game Studio | Quoc Tran

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Transcript of Crash Course in Building Your Indie Game Studio | Quoc Tran