How to divide up equity in your new game dev startup

Game development startups are somewhat unique in the tech industry. Not only do they have much more in common with traditional arts than most tech startups, they often don’t begin as outright business ventures at all. They may start out as a hobby, even as a one-man project. Often, they evolve into full-on teams of a handful of individuals or more. Still, many “business” considerations aren’t made until very late in the game, figuratively and literally, and this certainly leaves room for errors, hard feelings, or both.

Determining how equity in your fledgling games development company is distributed, well before it is worth even a single dollar, may seem like an exercise in futility. Your optimism about the project may be tempered by the knowledge that most game development ventures never yield a profit or take a long time to do so, so why not just focus on making the game, and go with your gut decision later?

We’re going to examine a few common misconceptions, hear a little insight from a few games industry startups, and examine a (mostly) hypothetical situation to see what difference, if any, the process makes.

See: 10 reasons why startups fail – from the confessions of founders

Don’t Blink

Malcolm Gladwell’s book Blink provides a great case for the miraculous ability of individuals to instantly come to judgments that are spot on. This is true whether they are discerning artistic forgeries or simply know the solution to a complex problem before executing the necessary steps – often when observable evidence points in a completely different direction. Anecdotally, we’ve all had times where an initial feeling that we ignored turned out to be right all along. So when divvying up the shares of a company, why should a two-person studio ignore its gut-reaction to divide things 50/50, when both founders are happy with that?

First off, if you’re an expert in this sort of thing, and you truly feel like a 50/50 split is called for, you could be right, though there are some who believe that 50/50 is the only wrong answer when two people are determining startup equity. If power is perfectly balanced, both parties can become powerless in short order. Unless you’ve got a stipulation in your founders’ agreement that will decide everything via a best-of-three Street Fighter II battle in the event of an impasse, a disagreement could be fatal.

Perhaps worse than the idea of getting it all wrong or creating a scenario that is potentially unresolvable is the realization people often put less deliberation in determining the shares of what is potentially their livelihood than they do in settling the tab at dinner. Why should I pay the same? I only had the salad!

We tend to take letting go of money in hand quite seriously. Psychologists call this weird tendency loss aversion. Assuming you come from a culture where “going Dutch” is normal, when it comes time to actually take money out of your own pocket, you will probably find yourself much more aware of all the factors involved and have a clear idea of your share. The abstract notion of stake in a company, especially one that may never earn a penny, leaves us far less inclined to delve into the details. That’s where, as they say, the devil resides anyway.

Indie Game: The Drama

Anyone who has seen the film Indie Game: The Movie will remember the story of Quebecois game developer and later Japan-offender Phil Fish. At one juncture in the movie, Fish is worried that he will have to pull his game from a conference because of a situation with his unnamed ex-business partner. Without taking either party’s side or even trying to examine the details, the situation points to the very real dilemma, one that can arise even if you’re not as polarizing as Phil Fish. What happens when things go south?

One easy way for a business relationship to sour is resentment over company equity. Hendri Salim, co-founder of Gamesaku (the games media outlet that later became our own Games in Asia Indonesia) recalled a friend that had decided to split things down the middle with a partner. When the friend realized that he was doing the lion’s share of the work in their startup, he raised the issue with his partner. Perhaps it was pride on the part of his partner, maybe it was the aforementioned loss aversion, but this helped to sour their relationship and all but ensure the startup’s failure just a few months later.

Hendri avoided any similar mess when he and his partner Glenn founded Gamesaku. They made allowance for Hendri as the originator of the idea to hold a larger company stake, with the two determining that the initial equity would not be re-negotiated later. They then focused on growing their business and turning it into a success, sharing all the burdens and workload that entailed. With that key point settled, they were free to do meaningful work, and spared an uncomfortable situation later when their startup was acquired.

An equally smooth transition can be observed from Witching Hour Studios, despite having an additional co-founder at the start. Ian Gregory Tan recalled that with his two other co-founders well versed in business, dividing up the equity was an easy process. He didn’t share the same business background, but with everyone on the same page and willing to put egos aside, to trust, and be honest with one another, the process was rather painless. Tan put it succinctly:

When you’re working with good people that aren’t inflating what they think they deserve, it’s really all quite easy.

TwoPerson Games

In this case, many intangible things were considered, with factors like who is pitching the idea taking precedent, and a focus on who will be the CEO. I arbitrarily chose John for this role, but they may conclude Jane is better suited. In that event, it jumps to 62/38. Based on the more active role she’s been playing in the project as a whole, perhaps that is the better option.

Linchpins and chain links