Royalties

[John Kirk]

I was recently contacted by a startup company that is interested in developing a video game based on my game Legendary Quest.  They are wanting to use the spells, classes, and monsters.  They are going to use the same basic game design, but will have to modify the rules slightly to fit a video game format.  The world setting will be their own invention.

The company is wondering what I'd be wanting for royalties if they based their game off of LQ.  Since they are a startup, I've told them I'm not interested in any kind of exclusive deal, but could otherwise work with them.  Unfortunately, I haven't the slightest clue as to what is "fair" and "standard" in the industry.  Or, if there even is such a thing.

I've asked around to various folks I know via e-mail, but nobody I've contacted seems to have any more knowledge than I.  So, I thought I'd post here to see if anyone has any experience in this area.  What is a reasonable royalty for licensing a game concept and trademark to a video game company?

[jdagna]

I don't know how helpful I can be on specific numbers, but my friend works as an editor for TokyoPop, who license manga for translation and reprinting into English.  He also tried to do this freelance once, but found it was way too capital-intensive.

Anyway, his negotiations had three basic groupings for royalties.
1) Up-front Fees:  This is a royalty paid up front in anticipation of sales.  In one case he mentioned, it was going to be 6% (of cover price of $10 US), for 10,000 units, or $6000.
2) Second-tier Fees: This is a second royalty paid out over x number of units if the publisher sells more than the quantity in #1.  In the case I know of it stayed the same 6% and applied to the next 20,000 units.  But this time, the money was only due after the sale of the units, not up front.
3) Long-term Fees: This was a second rate that applied to any units sold past the previous amounts.  In this case, they wanted 4% on all further units sold.

When dealing with small companies, that up-front fee is the most important part to negotiate.  Obviously, they want it as low as possible.  However, you have to be realistic - are they ever going to sell even 10,000 units? (For that matter, will they even finish the project?)  It's the only money you can count on receiving, so make it high enough that you feel fairly compensated without counting on any future royalties.  In the US manga industry, my friend felt that you could only count on selling about 3000 copies as an average, and you can bet the licensor knew that.

But ultimately you have to deal with the specific numbers yourself.  Asking video game manufacturers would probably be more useful than game publishers, since video games license all kinds of things.  In general, the more material you provide them with, the higher the fee (since you're saving them development costs), and the more name recognition your game has, the higher the fee.

The other sticky part of the contract will be control.  Do you have any say in the final product or not?  For a classic (and tragic) example of control, see the Teenage Mutant Ninja Turtles.  The original comics were black and white, gritty and deadly serious (for the most part), aimed at a teens to twenties market.  The TV show (and movies), were licensed without any rights to content control, and were poorly-done, humorous productions that butchered the characters and plot and appealed to an under 10 crowd.  The TV show and movies essentially killed off TMNT (as Eric Wujcik mentioned earlier in relation to Palladium's TMNT game)
.  Who has control over what should be discussed very clearly before starting on the project.

[ryand]

What is a reasonable royalty for licensing a game concept and trademark to a video game company?

If you care more about getting a videogame made than you do about the money (because you think the videogame will pad your resume, or raise the profile of your game), you can charge a fairly small amount - just enough to make sure everyone understands that they've got "skin in the game" and have to respect the IP.

"Fairly small" to me would be 1-2% of revenue, with a $1,000 guarantee.

Everything else in this message is directed towards someone who has a business interest in licensing their IP.

If you think your property is valuable and you think that computer games are something you believe will be an ongoing revenue stream, and the people asking for the license do too, then you can negotiate what I would consider a more "commercial" license fee.  Typically, there are two factors to such a fee:  The guarantee, and the royalty amount.  The guarantee in these cases is usually supposed to be the whole amount of the first year's royalty.  A royalty rate of between 5% and 10% would be normal - the closer to 10%, the more unique/valuable/distinctive your IP needs to be.  Let's assume, for the sake of argument, that you're on the 5% end of that spectrum.

If the licensee expects to generate $1 million in sales for the first 12 months of the product's lifecycle, and you've agreed on a 5% royalty on sales, then the guarantee would be $50,000, paid when the license is signed.  

Things to avoid:

1)  Non-cash deals.  If there's no cash, don't do a license.

2)  "Profit" royalties.  In any suitably complex business, like computer game software, "profits" can be made to vanish.

3)  "Perpetual" licenses.  You should do a license for a specific game, and that license should stipulate that the game has to go on sale by a certain date, or the license terminates.  

4)  "Brand/Line" licenses.  Don't do a license for a "line" of games - license (and get paid for) each game as a stand alone deal.

Things to ask for, but don't kill a deal if you can't get them:

1)  Approval of the whole product, including story, graphics, logos, audio, packaging and marketing.

2)  A "kill fee", an amount to be paid in the event the game ceases production or misses its target release date.

3)  Consulting rights, where you are given a certain amount of access to the design team and allowed to sit in on conceptual meetings as an advisor/consultant.

Things you absolutely have to have:

1)  Approval of the look & feel of the IP as used in the game.

2)  A license that requires your permission before it can be transferred or sold via acquisition or merger to a new company.

3)  The right to reject any admixture of your IP with materials from any other source (including the developers) unless you are granted ownership and full rights to that additional material.

[Valamir]

Ryan,

Great to have you on board sharing your expertise in areas like this.

Thanks.

[John Kirk]

Justin and Ryan,

I appreciate your thoughtful and thorough replies.  Your advice will certainly give me an excellent perspective from which to start negotiations.  You both made recommendations that I hadn't considered, most notably in control of the final product.  So, I'm definately glad I asked.

3) The right to reject any admixture of your IP with materials from any other source (including the developers) unless you are granted ownership and full rights to that additional material.

What does this protect me against?  And, is it realistic to demand ownership of the additional materials?  For example, are you saying that I should demand ownership of the world setting they are developing if I don't like the way in which they use my game materials within it?

Thanks again.