Our Corporate team looks at some of the important issues to consider before taking the next step in your gaming business’ journey.

There are a wide range of options available for securing investment in your business, whether through specialised VC funds targeting gaming start-ups, industry veterans turned angel investors or even crowdfunding. All these options and more have their benefits and drawbacks, however, the key concerns for your business often remain the same.

Decision making

The scale of the investment into your business could have significant ramifications for your control over decision making – assuming that it is structured as a limited company in England & Wales. The higher the investment, the more control you are likely to have to give up as investors look to secure their own interests and mitigate risks. Looking at the significant rights at different shareholding thresholds (in privately owned companies), you can see from the table below how quickly control can slip away:

A minority shareholder (or group of shareholders) with just over 25% ownership can block significant decisions and these rights extend further as their shareholding increases. Where multiple investors are involved, there is a greater risk that their combined shareholding could significantly limit the choices you may be able to make, even when you still hold a majority of the shares in the business. Nevertheless, retaining control of over 50% of a company’s shares does give control over board appointments, significantly influencing the day to day management of the business.

If you are in the very early stages of the development cycle for your first project, working alone or as part of a very small team, you may have not set up a corporate structure for the business. Although it can be seen as purely administrative, setting up a legal entity in conjunction with any business partners can help you to evidence that you are thinking ahead to the next stage of trading or investment. If you do need to contract with suppliers or customers, a limited company offers liability protection while also clarifying who is entitled to sign contracts on behalf of the business.

Key people

In many industries, sole traders or businesses focussed around one individual can be a risky investment as the key business relationships, product knowledge and technical expertise can be inextricably tied to that one person staying put (and staying alive). Even with a comprehensive key man insurance policy, a payout may not be sufficient to hire adequate replacements or ensure vital projects stay on track. Establishing a talented and committed management team, engaging in succession planning and retaining senior employees are all vital contributors to a successful business in the gaming industry – and reassuring potential investors.

It is important to consider the impact pursuing third party investment may have on your management team and key employees. Employee shareholding plans can be a good way of ensuring that employees are invested in the success of the business and stay put in order to realise the value in their shareholdings. In contrast, giving away too many shares early can restrict your options later on, leaving less equity available to investors before you put your decision-making power at risk (as mentioned above). In short, carefully consider which members of the team are vital to ongoing operations, retain them and be ready to explain your approach to succession planning as investors will be keen to understand the answers to these questions.

Future funding

When in desperate need of additional funds, securing any level of investment can appear critical, regardless of the strings attached, however, taking on board the wrong investor on the wrong terms can dramatically affect the direction of the business and the potential for obtaining future investment. For example, giving an early investor too much power could actively deter future investors, which is problematic when many gaming businesses may need multiple stages of investment to launch their first product.

In the same way that third parties can contribute to the business in ways other than cash, there are ways to reward their time and effort outside of shares. Technical knowledge, introductions to investor and publisher contacts and marketing expertise are all incredibly useful – but these contributions must be balanced against how much control you are willing to concede and your expectations for future investment. Assembling a development plan and roadmap for your business or even specific projects can help to identify funding requirements and what securing that investment means for the ownership structure of the business. In any case, any competent investor or publisher is going to need confidence that you understand what is required to achieve success and that you have planned accordingly.

Large, established studios are not immune from funding concerns either and often must choose carefully how cash reserves are allocated, as the recent difficulties at Bungie show. The takeover of Bungie by Sony places the financing and performance of Bungie into the orbit of the wider Sony Group, restricting management’s decision making both in terms of staff retention and the allocation of resources. Player disengagement, as has been seen with Destiny 2, can cause a decline in sales, placing financial pressure on the business to choose between ongoing support for a historic game or diverting resources to the next project. This is a tough line to walk as a reputation for poor content can diminish future sales, while investing too much into improving historic projects can push back the launch of other titles, with its own financial implications. In an ever more competitive market, high player engagement along with excitement for future projects is essential to fuel the development cycle and pay for new titles.

Crucial for any investment is making sure you have the right team around you to provide support throughout the process. Taking steps early to identify the right long-term advisors is essential as when it comes to seeking investment, as it is often your finance, tax and legal advisors who will help coordinate the information shared with prospective investors. Confidence that your advisors understand the sector, the performance (and projected performance) of the business along with the support available for businesses in the gaming industry can be invaluable in the long run.

If you have questions about what third party investment may mean for your business or what to consider around a potential sale of the business please do get in touch with a member of our corporate team and/or visit our Corporate Lawyers page.