Can a company thrive that lives up to the ideal espoused by Cervantes in The Three Musketeers – all for one and one for all?
Twenty years ago a cover story in Bloomberg famously envisioned a world in which corporations became virtual - suppliers, customers and even rivals would band together for a specific project and then dissipate into the night vapors without tax, commitment or adverse consequence when the project was complete. Collaboration between corporate behemoths, as opposed to competition, was the password that augured access to a kingdom of profit. Notably, however, Bloomberg did not advance any argument that a moral imperative would drive this trend. Rather, it was posited as being merely the inevitable result of technological improvements allowing large conglomerates to take advantage of each other’s skills without having to commit to true partnership or merged ownership.
In the growing spurt of small business formation emerging from the dust of the Great Recession, we are seeing a new virtual entity phenomenon, particularly in the new frontier of mobile video game development. Eschewing traditional two-dimensional hierarchical corporate structures where the few control the destinies of the many, mobile game developers are preferring to establish loosely organized collaboratives in which relationships are transitory and rewards are tied to commitment and effort as opposed to ownership and control. It should be no surprise that gamers are comfortable with intricate virtual relationships, but does this represent merely a temporary phenomenon in a unique business environment or does it presage a future to which traditional legal structures need to become accustomed?
The law purveys predictability in the face of an unknowable future. Corporations and other forms of limited liability entities create rights and responsibilities based on well understood legal premises that allow investment, work and risk to take shape within a legal framework that eases anxiety. A shareholder knows that within established parameters he is only responsible for his investment and not the liabilities of the corporation in which he has invested. A worker understands that he must fear his boss who has hierarchical control over him. He also has an expectation that his check will arrive within a week of performing his duties.
The mobile video game development world does not easily fit within those traditional corporate models. Fertile programmer minds focus on the development of content unfettered by such simple responsibilities as publishing, sales and collections because of the extraordinary worldwide access provided by engines such as the Apple App Store and Google Play. The need for start-up capital is usually minimal and the founding contributors often prefer to build sweat and innovation equity in the game over getting a salary. With mobile video game applications, the path from concept to phenomenal profit or abject failure can be concluded in a few months. A successful mobile game can be created by five programmers in dirty bathrobes, on five continents, who have never actually met, typing furiously on computers across the globe. There is no normal corporate entity model to choose to cloak their efforts in certainty.
Take the example of a single programmer living in New York City with a concept for a new i-Phone application that mimics the game of Hide and Seek. He knows he needs the attention of three good coders and an artist for three months to see whether they can pull together enough of a concept piece to get launched. He has a programmer friend in Norway that he “met” playing video games at night. The Norwegian friend knows an artist in the UK working days for a bank with time on his hands in the evening. They find one programmer in China and another in India. The most they see of each other is a once daily call on Skype. All dress for the call, but none knows the other beyond these moments. Computer languages are universal and culture in the cloud is no barrier to understanding.
In this almost virtual world, a corporate formality so simple as maintaining control over software code is difficult to enforce because non-disclosure agreements and copyright protections are by definition difficult to enforce in far-flung jurisdictions. There are no employees in any normal sense. There is no apparent hierarchy other than perhaps a bit of an organizing force from the original conceptualizer of the game. Despite the lack of traditional structure, there have been several notable home run games arising out of such collaborations and it seems as if the absence of structure itself may be fueling some of the creative success. How can a video game company structure its business to ensure that expectations are met without stifling the creative impulse in the process?
We start by speaking to the team to elicit an understanding of their goals and expectations. That understanding informs our advice as to structure. Each structure is different depending on the expectations we see. A Norwegian game programmer is unlikely to be interested in the legal benefits of a Delaware LLC, but he may be quite concerned about the implications of the US/Norway Double Tax Treaty for payments coming out of a US entity. An Indian programmer may wish to keep some of his funds out of India. A Chinese programmer may have an interest in obtaining a visa to come work in the United States. We consider whether the entity should be domiciled offshore entirely – meaning off everyone’s shores - in a tax haven, in the US because that is where the largest market may be, or elsewhere.
We do not start by imposing a structure that requires hierarchy, but rather we seek an understanding of the ways in which hierarchy might or might not match the wishes of the individuals and then suggest a type of governance structure that fits the perceived needs. Even in the heady environment of mobile game development, mundane choices do occasionally need to be made and there must be a structure that allows those choices to occur sensibly.
We question closely regarding the parties’ expectations of control over software code. Sometimes, the participants do not actually care that much about the individual pieces of code and are prepared to allow those to be used by the members of the collaborative in other endeavors that do not conflict with the project at hand. In those instances, the code itself can be considered like a tradesman’s tools to be taken from job to job by the programmer. In other cases, control over the code is of greater importance to one or more of the participants. We tailor the non-disclosure agreements to match as closely as possible the collective understanding. In all instances, we make sure that the enterprise itself maintains a powerful license over the code in order to market its product successfully.
There is rarely much cash with which to pay people in these virtual development teams. The money is all “on the come” assuming that the project successfully monetizes. Therefore, we pay careful attention to crafting a comprehensive distribution waterfall that properly rewards effort and success. The waterfall can become quite complex, particularly, as is often the case, when the members of the collaborative want to provide for the possibility of multiple development efforts over time. We have found that, not surprisingly, it is the adequacy of the waterfall in meeting expectations that minimizes disputes as time progresses.
We often find that ownership of the shares of the enterprise is less important to the members of the team than the workings of the distribution waterfall. Nevertheless, we make sure that the shareholdings correctly match the parties’ wishes.
We do our best to rein in aberrant behavior through “invisible fences” such as fair minded dispute resolution mechanisms that encourage communication rather than a quick flight to the “mattresses” when a problem arises.
Unlike the large corporate environment that the famous Bloomberg article sought to describe, the manner in which these video game development partnerships are created appears to reflect a world view of the participants surrounding fairness and commitment rather than a struggle for profit at the cost of personal relationships. It is as if they have taken on board certain lessons learned from playing the games they develop. The team’s struggles against the rest of the world represent mortal combat, but within the team itself the struggle is for equity for all – much like Cervantes’ musketeers.
About the Authors
Jonathan Bell is a shareholder in Greenberg Traurig’s Corporate & Securities Group and a member of the firm’s Video Gaming & Interactive Media Team. He acts as counselor to publicly and privately held clients throughout the United States, including businesses focused on alternative energy, biotechnology, electronics, manufacturing and retail.
He has wide-ranging experience in international transactions, including overseas acquisitions, public offerings, financings, and licensing and distribution agreements. Jonathan practiced in London for several years, and has represented clients in transactions in more than 30 countries and in all major business centers. He can be reached at 1.617.310.6038 or [email protected].
Abdullah Malik is an associate in Greenberg Traurig’s Corporate & Securities Group and a member of the firm’s Video Gaming & Interactive Media Team. He focuses his practice on mergers and acquisitions, securities transactions and compliance, venture capital transactions, emerging growth companies and transactions relating to outsourcing and information technology. Abdullah has represented private equity and venture capital funds, as well as privately and publicly held businesses in a variety of industries including software, clean tech, life sciences, pharmaceutical, health care and technology services. He can be reached at 1.617.310.6083 or [email protected].