One topic that doesn’t come up often in discussions of game development is the various ways that funding can be found. While most developers these days seem to opt for crowdfunding through Kickstarter, there are a number of methods to get money to develop your product.
Here’s a brief overview of a few of these fundraising opportunities and the legal implications.
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“Bootstrapping” refers to paying for the business yourself, whether it’s through savings or credit card debt. This is certainly a viable way to fund game development, but it’s usually a better idea to use other people’s money instead.
This takes a good amount of risk off the developer’s shoulders and allows them to concentrate more on delivering an amazing product. How do you do this? Try one of these other methods…
Friends and family loans
One of your best initial funding sources is your friends and family – the people who are most likely to believe in you (hopefully). As a loan, there is no expectation of profit apart from interest, so you can avoid any securities law issues. We’ll get to those below.
An additional benefit to having friends and family invest in your project is that they may be more understanding if the project fails. Banks and crowdfunding backers certainly won’t be, so if you need a jumpstart of cash, this may be the best option.
Another type of loan to get you started is a standard business loan. If you’ve formed an LLC or Corporation, you may be able to get the loan in the company’s name. However, unless your company has a track record, you will probably end up having to personally guarantee the loan and use your personal credit worthiness to get it.
In the absence of other sources, though, this may be the way to go, at least for that initial capital.
Front money investment
A financing method common to many creative industries is called Front Money, or Seed Money. This means that you get investors to front the new project some money in return for equity or royalties later on. This seed money is meant to start development of the project until further funding for the entire venture can be found later. This type of investment does, however, invoke securities laws, so the counsel of an attorney is strongly recommended.
Indie game funds
Similar to seed money investment are indie game-specific funds, like Indie Fund and Sony’s Pub Fund. These usually work in a similar manner – the funder gives a certain amount of money to the developer up front in return for royalties after the game is released.
Donation-based crowdfunding is probably the most popular with game developers these days. You and I know it as using Kickstarter, IndieGoGo or some similar type of crowdfunding platform. This type of fundraising is not considered an investment and avoids any securities law issues.
This does not mean that there is no legal liability, though. You are entering into a contractual agreement with your backers to deliver the promised rewards. Because of this, you need to get your project planning together before entering into this type of relationship.
One way of financing a new business that isn’t very popular in the game development industry, but is very common in the startup world, is equity fundraising. Basically, you are selling equity in the company in exchange for startup capital.
This type of fundraising DOES implicate both state and federal securities laws. When a company does an IPO, offering shares to the public, this is a form of equity fundraising. This is a long and expensive process which generally requires lots of lawyers and disclosure documents about the financial health of the company. This type of fundraising has the potential to raise a lot of money.
However, there are a number of exceptions to the legal requirements of a public offering. An offering to a smaller number of investors or to a larger pool of certain qualified investors can avoid the need for expensive registration procedures with the SEC. For those that have raised seed money and are looking to take the next step, this may be a good option.
Since the passage of the JOBS Act in April 2012, the crowdfunding industry has been waiting for final rules on the so-called “equity crowdfunding” process. This would allow companies to use the power of crowdfunding to sell shares in their company. It would be like using Kickstarter to sell pieces of your company, rather than just the game. There would be certain crowdfunding portals that could be used for this (not Kickstarter).
Years have gone by, though, and the rules still aren’t finalized. I’m not entirely sure this is a method that game developers will opt for, as the Kickstarter route brings with it a lot less red tape. For those that want to grow beyond their first couple of games, though, this kind of crowdfunding could be just what they’re looking for.
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I hope this was helpful for all of the developers out there. If you have any questions or are looking to explore one of these fundraising methods, feel free to contact a game lawyer.