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Case Study: “Agreeing on a Game Plan” Irish Times “Innovation” Fri, Sep 04, 2009
CASE STUDY After Peter Walsh developed a computer game with his college friend, he thought his career in gaming was on track. Now, they are in debt, the game is still not on the market and there is potential conflict over the next step forward.
Background By the time he was a young teenager Peter was well used to being called an "anorak" and hung around with a group of like-minded youngsters who were always thinking up ways of improving existing games. His best friend, Andy, shared his obsession with the technicalities of computer gaming. It was clear to Peter's parents that his future lay somewhere in the world of IT. By the age of 16 he had already begun developing his own games and learning the skills and techniques required to make them come alive. A bright all-rounder, Peter cruised through his Leaving Cert and went to university to study computer engineering. Having completed his masters, he proceeded on to a doctoral programme. His parents hoped that his time at university would broaden his horizons and that his fixation with gaming would wane. What they failed to bargain for, however, was Peter's total obsession with gaming. For him his studies were a means to an end - the acquisition of the tools he needed to become an expert games creator in his own right. When he finally left university he was snapped up by a multinational software company, but he spent all of his spare time working on his own gaming projects.
The “big” idea... While at university Peter had started work on a new game targeted at pre-teens. The idea was originally Peter's but he and his friend Andy - who had also studied computer engineering - spent hours working on the game together. By the end of 12 months of intensive work they felt the game was good enough to test on prospective users. When the feedback was unanimously positive, they were on top of the world and, with visions of becoming gaming millionaires before they were 30! They decided to set up a small company to bring their game to market.
Doing the business Peter's father, a businessman, brought the pair back to earth with a jolt. Pressed for details about their plans for funding the venture and their proposed route to market, it became clear that the boys needed someone with business acumen to complement their technical skills. Peter's father urged the pair not to give up their day jobs until they had hammered out a business plan that was as good as their product. When the boys finally sat down and costed their idea it became clear that their venture was going to need a substantial investment to get it up and running and that their combined resources fell well short of what was required. They made several approaches to State agencies with their proposal and, while the feedback was broadly positive, their lack of business experience and commercial detail was a problem.
Making a “deal”... A friend's father offered to put them in touch with a potential investor who would also bring financial and marketing expertise to the venture. Their potential new partner listened carefully to their product idea and made a number of helpful suggestions about how it might be brought to market quickly through a joint venture with a well-established market participant. He appeared to know the ropes and said he would get in touch with the relevant people. He also had good banking connections and brought the boys to meet his bank manager. Their new partner was satisfied that the initial funding required could be raised from an upfront payment from whichever joint-venture partner they chose to link up with. He said he would handle the formalities of establishing the new company and setting up their partnership agreement. In return for all of this he was looking for a one-third stake in the venture.
Trouble! Six months later with the project progressing at less than snail's pace, Peter and Andy began to realise they were not top of their new partner's agenda. After nine months they finally had to face up to the unpleasant truth - their white knight talked the talk but didn't walk the walk. They tried to exert pressure on him to deliver or pull out but he simply avoided their calls. Eventually they sent him an ultimatum asking him to clarify his position. By return they received a bill from him for "marketing consultancy" running into thousands of euro. The boys have looked at the possibility of taking legal action against the potential investor who is now hounding them for payment of his "fees". They believe they have a case but have been warned that in the absence of proper documentation they might not win and, even if they did, getting any money awarded by a court might prove extremely difficult. When the pair realised that their white knight was nothing of the sort they desperately began making phone calls trying to generate interest in the game. They have met with some success - another small, but longer established, games company in the UK has indicated it might be interested in acquiring it.
Solution...? The company has suggested it would pay a small amount of money upfront and handle all production, sales, marketing and distribution under a global licensing arrangement. The inventors would be paid a modest royalty on each game sold. Andy (the friend) thinks this represents the best way forward. It would mean connecting with a company that clearly has a good foothold in the industry and could lead, in time, to bigger and better things. However, now disenchanted with his first experience of the corporate jungle, Andy wants to take a year out to travel. This deal would give him the money to do this and a continued financial interest in the game. Peter (the “anorak”) thinks Andy is bailing out too soon. He accepts that they have made major mistakes but he is adamant that selling on the terms proposed would be tantamount to giving away a highly valuable asset for half nothing. He believes it would be something they would regret for the rest of their lives. This divergence of views has raised an issue over who "owns" the game and who has the right to decide what kind of deal, if any, is acceptable. Peter and Andy have always behaved as if they are equal partners but recently, through heated discussions between the friends, it has become clear that Peter believes that he is more entitled to call the shots because he is the originator of the game. The situation has now reached stalemate and progress is stalled. Meanwhile the UK company is looking for a decision on the proposed deal. If they can't resolve the situation quickly Peter and Andy stand to lose everything they have worked for, including their friendship.
How should Peter and Andy progress...?
Case Study: “Agreeing on a Game Plan” EXPERTS’ ADVICE Peppe Santoro - legal John Cusack - business
Expert #1 - Peppe Santoro Corporate partner of Eversheds O'Donnell Sweeney PETER AND ANDY are learning some invaluable lessons. Unfortunately they're doing it the hard way. Business relationships need certainty. You don't need a complex legal document to have a clear understanding of whether a business partner is an angel investor or a paid consultant, who owns the rights to your work product, and how you're planning to make a success of your business. However, you do need some kind of agreement and as the stakes get higher the demand for formal legal documentation increases. They've slipped up in their business relationships with each other and with their "angel investor". Business owners need a thorough understanding of what creates value in their business. In this case it's intellectual property, but it could equally be contractual relationships or plant and machinery. Entrepreneurs need to be careful about parting with ownership of their business, even a minority share. They must also recognise the importance of having trusted advisors and the need to prioritise the business over other distractions. Their former investor now looks like one such potential distraction. The same difficulties they would have claiming against him will also be their defence to what sounds like a spurious claim from him.
Expert #1 - Peppe Santoro cont/... As to ownership of the copyright in the computer game, this is most likely to vest in both of them as joint authors of the code underlying the game. Peter may be surprised to learn that his bright idea attracts very little protection under Irish law. It's the expression of that idea - millions of lines of computer code - that attracts copyright. This is the primary way software is protected in Ireland. Another twist is that Peter's employment contract with his multinational employer will have to be read carefully to ensure his employer doesn't own any work product created by Peter during his employment. Andy and Peter, not having established their business relationship as a company in which they both hold shares, will be deemed to be in partnership with one another. Irish laws governing general partnerships date back to 1890, an indicator of how suited they are for modern commercial use. Peter and Andy could look to the courts to resolve their differences but that will be expensive, time- consuming and unproductive. It would be far better if they could reach an agreement that would involve Peter buying Andy out, probably with some or all of the price being left outstanding or being conditional on how the business performs. The simple fact is that it's most unlikely the prospective UK licensee will be prepared to deal with either if they are not in agreement.
Expert #2 - John Cusack Commercial director of Wind Energy Direct and business mentor ANDY WANTS some cash to fund his travel plans and Peter is thinking of a longer-term business. Despite the game being Peter's initial idea, it's highly probable the game's intellectual property right (IPR) is owned by the company they formed and, assuming their shareholding in that is 50:50, they are at an impasse. The path to resolution is: Peter to gain control of the company that owns the IRP. Andy's desire to travel, and need for cash to do so, is key. If Peter can afford to pay Andy enough cash for his first three months travel, in return for a deal where Andy sells shares to Peter, he will gain control of the company and the sale process. This approach has cash flow benefits for both. Importantly, Peter has time to tie up a partner deal that generates cash and he has minimised his upfront cash needs. Peter should aim to make further payments during the year to Andy for further shares. The selling points for Andy are that he gets cash to travel and still has some upside from a future deal on the game from the profits related to his remaining shares. The upside for Peter is that he gains control over the future of the company and so the game's future.
Expert #2 - John Cusack cont/... Peter has an additional asset in negotiations in that he conceived the game - proving he is creative and not just technical - making him valuable to potential partners. He must be careful not to have "his value" paid into the company that Andy has shares in. Peter is in a reasonably strong position to maximise his, and the game's, potential. He needs to be clear about what his personal objectives are first. They seem to be a compromise between the creative, technical and financial. I expect a revenue flow to fund his next game will be high on his list. He needs to utilise Enterprise Ireland's contacts and lift the phone himself to get appointments with additional partners. Unless he has more than one potential partner he will have difficulty getting a good deal. His chosen partner should have a strong sales and marketing focus with a proven track record in his segment of the games market. Some partners are stronger in different geographical markets and more than one partner may be the ideal outcome. Once he narrows down his partner choice he needs an experienced commercially savvy lawyer who has acted in this area before. Enterprise Ireland can potentially supply a mentor to give practical and valuable advice here. If Peter does not buy all of Andy's shares he needs to look at setting up a new company for future IPR, otherwise Andy will continue to benefit from Peter's future work.
Case Study: “Agreeing on a Game Plan” Irish Times “Innovation” Fri, Sep 04, 2009