Royalties are a central part of any game publishing agreement, determining how revenue is shared between developers and publishers. Understanding how royalties are structured can help developers make informed decisions and avoid unexpected financial pitfalls.

The Basics of Royalties in Game Publishing

Royalties are payments to the owner of a piece of intellectual property, like a video game. Accordingly, royalties usually represent the developer’s share of revenue generated from sales of the developer’s game. The percentage paid to the developer varies widely based on factors such as platform, distribution channel, and the specifics of the publishing agreement. Some contracts offer a fixed royalty rate, while others include tiered structures where rates increase as sales milestones are met. Royalties may also include a share of revenue from other ventures that involve the game’s narrative, characters or setting, like film and television adaptations, action figures, board games, or graphic novels.

Recoupment: The Publisher Gets Paid First

In many publishing agreements, publishers add value to the success of a game by providing the developer with funding for development, marketing the game, and obtaining necessary permits and ratings board approvals to enable distribution of the game. All of those require upfront expenses from the publisher. As a result, the video game industry has adopted a common practice of “recoupment” in publishing agreement.

“Recoupment” provides that once the game starts generating revenue, the publisher retains a larger share of that revenue to recover its initial investment, which may be all of the initial revenue. This means that costs such as marketing, localization, porting, and distribution are deducted from the revenue before royalties are paid out. Developers should carefully review recoupable expenses to ensure they are clearly defined and reasonable.

Some agreements will allow for a tiered royalty rate in which the developer may receive some revenue share from the first dollar, then more once the publisher has recouped. Alternatively, once recoupment is reached multiple times over, the Developer may receive higher tiered royalties.

Net vs. Gross Revenue: Understanding the Differences

Royalties are typically calculated based on “net” revenue generated by the game, which is derived by subtracting deductions from “gross” revenue. Gross revenue refers to total earnings of the game before any deductions are made. Net revenue refers to earnings after deductions, which are commonly made for expenses such as platform fees, payment processing fees, and marketing costs. While defining sources of revenue can be important, royalties are most often calculated based on net revenue, so developers should pay close attention to how these deductions are defined and calculated.

Both of these definitions can be manipulated in ways that can have big effects on the developer’s and publisher’s cash flow. For example, “gross revenue” may be all revenues generated from all exploitations of the game’s intellectual property anywhere. Or, it could be just from sales of the game on one specific platform. Revenue may also only be defined as what is received by the publisher (meaning if the publisher licenses downstream publishing rights to a third party for a specific territory, the developer’s eventual cut could be substantially reduced).

More aggressive publishers may try to include things like internal costs or overhead as deductions. Those costs, while appropriate in some cases, introduce some accounting complexity: “overhead” in particular is specifically defined as indirect costs, so attributing these costs to specific revenue streams can be an imprecise exercise that informed developers will want insight on. In other deals, publishers go so far as to include more favorable royalty splits for platform deals they negotiate, which may or may not be appropriate depending on value of that particular platform deal. In each case, developers should scrutinize these terms to make sure they receive a fair share of the revenue their intellectual property generates.

Advances and Minimum Guarantees

As mentioned earlier, the traditional publishing agreement includes development funding paid by the publisher to the developer, which is commonly later recouped from proceeds of the game. Some publishers recently (as of this writing, 2025) are electing to invest in a game later in its development process, after the game has been largely self-funded by the developer. In those cases, the publisher may offer the same general “go to market” publishing services, but take a lower percentage in royalties since the publisher is taking on less overall risk. While development advances offer immediate financial support, they can delay royalty payments until the publisher has recouped its costs or result in less favorable royalty splits for the development.

Less common in publishing agreements, but not unheard of, is a “Minimum Guarantee” (sometimes just called an MG). This is more common with smaller publishers, publishers serving primarily a marketing function, or publishers dealing primarily in physical distribution, though some publishers negotiating platform exclusivity deals use this structure as well. A minimum guarantee ensures that a developer receives a set amount regardless of sales performance, providing a level of financial security and predictability.

Negotiating Favorable Royalty Terms

In addition to the larger considerations described in this article, smaller mechanical provisions can add up to a significant different, either in royalties received or general confidence in the process. For example, developers should consider analyzing a few of the following terms as well:

• Recoupment Terms: Ensuring expenses are clearly outlined, categorized appropriately, and capped if appropriate.
• Revenue Splits: Securing a fair share of net revenue, especially after recoupment.
• Payment Frequency: Establishing a schedule for regular royalty payments.
• Audit Rights: Retaining the ability to verify publisher-reported earnings through financial audits.

Conclusion Understanding how royalties work in game publishing agreements is essential for developers looking to maximize their earnings. By carefully reviewing and negotiating terms, developers can secure a fair financial arrangement while ensuring sustainable business growth.