Sell our souls to the devil. The risk of debt for equity deals.

We all love ‘Diablo’ but would we sell our souls him?...

Last week my colleague Anthony and I gave a presentation of our latest game to a potential funder. We managed to get the opportunity and the game USP across well. The budget and schedule were well organised and thorough (I am sure they will pick these to pieces). We also showed how we had mitigated risk and overall, I was very pleased with the pitch.

Anthony also thought the presentation went very well and sure enough, the funder closed the meeting with the words ‘It all looks very exciting, we’ll get right back to you!’. We are now indeed, very much hoping that we might get a firm offer.

On the way back from the meeting, as the warm glow of a job well done subsided and I returned gradually back to earth, I picked over the bones of the conversation. I thought through the broad terms of the deal, looking at possible pitfalls and the implications of the various strings attached. As I thought it all through, I became a bit nervous about it.

This funder is a particular type of funder, a type that is becoming more prevalent these days – a ‘debt for equity funder’! In this case, the investor/lender lends you the money that you need to complete your game. You pay back the money at a high-interest rate and they get a piece of your company in return as well! The deal is also secured against the game.

This started to look like an expensive proposition to me. In my experience, when a publisher funds a game they usually take the lion’s share of the money, but they don’t (initially at least) try to take an equity stake in your firm, and they don’t always need to own all the rights to the game (you may get to keep them or they may be shared).

Also in my experience; as an Angel Investor. Here the investor takes a piece of your company for the money. That money does not get paid back until there are enough company funds to do so via dividends or until your company is sold.

A third experience I have is with loans. While the interest may be high and is fully repayable along with the capital sum, unless they are convertible, there is no actual stake in your company for this money.

With this deal, I suddenly felt squeezed, like I would be paying both ends. Paying in interest and in shares and - how much of each? It just didn’t seem fair. They get the money back plus interest and shares and a say in the company too!

Left with a dilemma and not wanting to start any new potential new deal on the back foot or feeling resentful I spoke to a trusted friend and experienced business advisor Nick Clark and we looked at the Pros and Cons.

On the one hand, the money was expensive, it could be a struggle to pay back if the game was not a big enough hit. We would lose some ownership and likely some control too.

On the plus side, the funder is knowingly taking the high risk and the money is agreed and available quickly. There are no personal guarantees to the developer.

A hit then, the funders have a great deal, they get their money back and a piece of the action going forward.

A failure then, the funder accepted the risk up front and paid the price for that with only a dent to the developer’s pride.

Ideas come to thick and fast in the games business and so is the money really that expensive? A percentage of nothing is nothing. In this case, there is a demo and tech too so it’s more than just an idea but still, if it doesn’t sell the work is not wasted and can be repurposed or reskinned in some way.

Ultimately, this is not the only deal out there and we are pursuing many conversations. If we do take an offer it will be considered in light of all of the above and using all our best negotiation skills too 

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Things tend to go well if all the numbers stack up and the development and marketing execution is good. If a risk is taken, then let’s make sure it is well-managed risk. If it’s a hit all well and good. If God forbid, the game fails, then the funder's risk is covered from their other high-interest deals. Nobody dies and everyone lives to make another game!