Many people know that when video games are published, revenue share (often called royalties in that context) may be shared between the involved parties. However, revenue share arrangements often exist for collaborators or even service providers to equitably divide the fruits of their labor, especially when cash compensation may not be available at the outset of their relationship. Understanding how revenue share payments may be structured can give a new studio a lot of flexibility in the way they attract and reward talent.

The “Revenue” Definition

Revenue Share is what it sounds like: some amount of “revenue” “shared” between parties. “Revenue” can be defined very differently from agreement to agreement. It may be simple gross revenue, meaning all revenue earned by the resulting work. It may be gross revenue “actually received by a party”, excluding from the calculation any money taken from platforms or publishers before the party divvying it out receives the remainder. It may even be “net revenue”, where the payor receives revenue and deducts certain enumerated or categorized expenses prior to distributing the remainder, often directly allocable expenses like taxes, costs of goods sold, payment processing fees, and distribution fees.

Defining the scope of this revenue, as well as the deductible expenses, are core questions for contributors to answer. Where the recipient of revenue share provides porting services for a video game, for example, those services may be sufficiently narrow so as to only entitle that individual to revenue share on the resulting port. On the other hand, a lead narrative designer shaping the fundamental nature of the core intellectual property that will be commercially exploited in myriad ways may be entitled to participate in all of those exploitations. Revenue Share may even entitle individuals to participate in the sale of the underlying property or even the business to a third party.

Similarly, expenses are critical to define the pool of revenue. Many questions may arise when defining the this pool. Is the success of the project inextricably tied to a successful marketing campaign? It may be appropriate to deduct marketing expenses. But are those expenses defined and capped, or left in the marketing party’s discretion? May the distributing entity rely on an affiliated entity to provide supplement services and deduct those costs? And can any costs invested far before the release of a project be “recouped” prior to the project’s revenue share being due to revenue share recipients?

The “Share” Share

That pool of revenue is then modified by the service provider or collaborator’s percentage of entitlement. The amount of that entitlement, and the method by which it is earned, is a common source of debate between collaborators. Where a recipient of revenue share is creating discrete deliverables, for example, they may receive tranches of revenue share after the acceptance of their deliverables by the commissioning party. Where a recipient is providing harder-to-measure services, their revenue share may “vest” based on their time in service instead, which may include “cliffs” to ensure an initial up-front service commitment. All of these structures may come alongside or in lieu of standard cash compensation arrangements, with interplay between the two.

Nuances and Pitfalls

Done thoughtlessly, Revenue Share awards can create some administration and unforeseen pitfalls. For example:

• Revenue Share awards to employees that survive termination of that employee’s employment may lead to W-2 compensation and corresponding FICA taxes for a longer duration than expected (assuming the arrangement passes IRC 409A muster);
• Perpetual obligations may create accounting headaches down the road when the project is not generating as much income as it did initially;
• Revenue Share obligations may survive or terminate with the underlying project, or even the payor entity, when sold to a third party; or
• Revenue Share audits may be disruptive and costly, particularly if reimbursement is required.

These pitfalls can be addressed in as many ways as they arise. Many revenue share arrangements contain a payment threshold, below which revenue share is not owed in the payment period, but instead rolls over into the next. Others terminate once revenue falls below a specific target, sometimes with a revival mechanism where revenue spikes years later for any reason. Still others simply place a cap on the duration of revenue share payments or the total receivable by the relevant service provider, even if the game ends up being a smash hit.

Accordingly, both the payor and payee should carefully consider what the revenue share relationship looks like from the first day of their agreement, to the project’s release, and then to decades down the line when the project may be branching out into unique exploitations or beginning to tail off. Clear terms at the outset can prevent misunderstandings later and allow teams to focus on making great games.