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How to Work With Investors: A Video Game Funding Guide

How to Work With Investors: A Video Game Funding Guide

April 29, 2022
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So, you've found an investor who is ready to put money into your studio or project. Now's the time to put your relationship on paper to avoid possible future complications in your video game funding. You should be well-informed ahead of time to ensure that your cooperation is mutually beneficial.

This article will explain what to expect from a deal, which points to consider when signing a contract, and how to prepare good reports.

If you're still seeking an investor, see our detailed article outlining how to find a potential backer.

What You Need to Know About Investors

Before focusing on contracts, penalties, and termination clauses, you should learn the basics of investment principles — in other words, what investors are looking for. This will help you go into the situation with expectations about both sides and how you can find common ground.

The Investor Is Your Partner, Not Your Friend

While you've invested your energy, ambition, and care into your game and its gameplay, an investor has other priorities. Their only goal is to get the desired rate of return on their investment. Keeping this in mind throughout your dealings will help you focus on a professional relationship and prepare you to remove unnecessary emotions from the equation.

An Investor Always Strives for Efficiency

An investor is ready to make decisions that you may find cold and calculating to maximize profits. For example, they may fire part of the workforce once they finish their work and the need for their services disappears. This does not characterize the investor as a bad person — their principles can simply differ from those of developers. You may want to build a successful company where employees are happy, your brands are famous, and your games are critically-acclaimed. While an investor simply wants to see profits and a sizable profit.

Just Like You, an Investor is Interested in a Profitable Project

During difficult times, or when you face issues you're not yet experienced enough to handle, an investor can help. Perhaps they are not good at game development (especially if they are not a specialized investor), but they typically know how to do business. Therefore, their advice could be beneficial. Don't miss the opportunity to use their help to learn new skills and grow your knowledge.

What to Keep in Mind When Making a Contract

The most unpleasant situations often arise from poorly crafted contract documents. Make sure to spell out all the details of your relationship with the investor on paper. This guarantees that you will get your money, receive it on time in a pre-defined quantity, and retain ownership of your company.

For example, your investor promised not to interfere in the company's operational management. However, they may decide to change the CEO during a problematic situation since their stake in the company contractually provides them this right — now your studio is governed by someone else.

Before signing a contract, you should work on all areas that may lead to difficulties. You will certainly need a qualified lawyer at this stage. If you can't afford an internal legal resource, outsource one from a law firm. While expensive up front, you won't regret the support of proper legal counsel. A lawyer will help you correctly formulate your agreements on the main blocks of your deal.

Here’s a list of the main points that you should pay attention to when you sign a contract:

Financial Terms

These terms will define the financial scope of the partnership, such as the amount of compensation due to the investor, how payments will be paid out, what happens in case of breach of contract, and so on. 

Project financing
Define the main terms regarding the investor’s obligations, including the number of payments, their size, and timing.

The size of paid-in capital, contributions of participants of the deal, and investor’s stake
This is necessary to understand the rights and obligations of the deal participants. In particular, this point will clarify which rights your partner gets by acquiring a specific stake in your project.

Investors’ liabilities for breach of contract and failure to fulfill financial obligations
Decide which sanctions are provided, what you get in case of contract violation, whether the investor loses their share of future profits, etc.

Possibility of second-round financing
A project often needs an additional investment stage (a so-called ‘investment round’). That’s why you should understand whether the current investor will deliver additional funding or if you will have to find new partners in advance.

For example, an investor could finance the creation of the prototype in exchange for a stake in the company. The next move in the traditional development cycle is to find a publisher. However, the prototype may show significant results, so the company may decide to maximize its profits and skip searching for a publisher to increase investment in development and marketing.

Distribution of income
Is your priority to develop the project or repay existing investments? In what proportions will the projected income be distributed? Do you take overhead and operating expenses into account when distributing income? These details can differentiate between solid earnings and an attempt to survive until the end of the month.

Investor rights in making management decisions
You should clearly understand the investor's potential actions and the questions that you will be obliged to coordinate with them.

Investor payments, for example, interest on the loan
If the investor’s participation in the company is formalized in this way, such payments may be taken as a kind of "insurance" for their investments.

Business Project Management

Having reached an agreement on financial issues and distribution of income and stakes, you may be sure that you share the same strategic picture of your partnership. Now, you are ready to proceed to the second important block of the deal.

Investor’s role in the company
Even if an investor has the right to participate in business processes, this right should be realized — not every investor will use it. You have to first agree whether intervention in management procedures will be a constant process or whether they will limit it to periodic checks and proposals. Also, an investor can leave out this burden and remain an external observer.

Company CEO
Perhaps the investor will decide that your management experience is insufficient. You’ll agree on a more suitable candidate for the CEO role, providing you with more time for game design or marketing.

CEO rights
Here we’re talking about the rights that come in addition to those due to a CEO by law. Determine which decisions the CEO can make alone, which ones must be discussed with other team members, and which decisions are outside of the CEO’s scope.

Unanimous decisions
Typically, these include the most critical decisions, which have the most severe potential consequences for the company.

What to do if one of the partners disagrees with the majority opinion
Do your partners have a "veto right"? Are decisions made by a qualified or straightforward number of votes? What will you do if you cannot reach a consensus?

Exit

You should formalize all the above issues to protect yourself from (potentially) unfriendly moves. Even the most talented entrepreneurs can lose control of their company, and your task is to do everything to avoid this. Among other things, you should work on the issues associated with the exit from your venture. Exit terms should be discussed when you negotiate the contract to protect yourself from a sudden loss of both partner and investments. The more problems you solve in advance, the easier your work will be in the future.

Exit terms
Determine the exact terms and include scenarios when partners’ obligations are fulfilled in full or in part.

Will existing partners have a priority right to buy stakes of former partners or investors?
Usually, developers try to include this condition in the contract. It obliges the investor to provide the developer with the opportunity to purchase their stake if they want to exit from the project.

Will partners have restrictions on selling their stake? F
or example, you should determine whether your investor has the right to sell their stake before they make the final payment or if the developers can bring other investors to the project by providing them with a part of their stake.

Partners’ Responsibility in Case of Breach of Contract

Do partners have the right to carry out similar activities in other companies? This is an important point, especially in the game industry, where company employees are often prohibited from working on personal projects if they are in the same field as their main job. Also, should the investor be able to put money into your company’s direct competitors? This point will be handled differently on a case-by-case basis.

How To Formalize Your Relationship With an Investor

Having agreed on all the conditions, you will be able to spell out all the terms and choose the appropriate form of your cooperation. Here are three of the most popular options:

Investor Gets a Stake in the Company

This happens when the investor gets a share in the company in exchange for their investment. In this case, the investor acquires the right to participate in the firm's management. During the negotiation stage, you should discuss how this participation will be implemented and then write down the specific terms in the contract.

In particular:

  • Indicate how management responsibilities are divided between partners.
  • Determine the powers and limitations (if any) of the company’s CEO.
  • Decide how the company income will be distributed between partners.
  • Indicate whether partners’ heirs will have rights to their stakes in the company.
  • Define exit terms.

Investment Contract

Suppose the investor is not ready to acquire a stake in the company. In that case, the simplest way to formalize your relationship is to craft an investment contract in which you will define the issues mentioned above.

This document confirms the most fundamental agreements of the contract’s parties. The investment contract includes the details of the financing process, parties’ obligations, nuances of management structure, and options for resolving potential conflicts. At its core, an investment contract is an instruction on the stages of project development that signatory parties should complete.

Loan Agreement

This is an alternative way to formalize your relationship with an investor who will not participate in the project's life. However, this agreement has a significant drawback - it is not directly related to the project, especially in terms of business management, and your verbal agreements will differ from written ones. In case of failure, you will have to return the money. At the same time, the investor will not get big profits even if the project is successful.

In this light, the optimal option is to sell a stake in your company or enter into an investment contract. In both cases, you will be able to write down any verbal agreements for the parties. This approach will provide you with a better chance to balance the result with the partners’ expectations, which increases satisfaction from your cooperation and saves money on litigation.

Investor Reporting

If you have successfully signed a contract and resolved all issues, your relationship with the investor becomes understandable and straightforward. To keep it this way, contact your investor at an established regular cadence — monthly is standard — and report on your progress even if the next investment tranche is far away. There are several reasons for this:

It’s the right thing to do. Investors count on you. They gave you the money to make a profit, and they want to be sure that you spend the funds wisely and ensure your words do not diverge from your deeds.

A lack of news is alarming. You have given money to someone, but the company remains silent. What do you think? Something bad happened? Is the project bankrupt? The project owners took the money and disappeared? Communication is key.

Problems should always be reported. You will undoubtedly face problems — and you’ll need help from investors. They may assist you with advice and additional funds. Also, you may enter a waiver agreement in case you need a new investor. However, investors must know the actual state of things and the dynamics of changes. Who would you want to help — a company that took your money and stayed silent or a studio that gave you constant updates every month?

How to Create an Effective Investor Report

An excellent report provides a clear and straightforward view of the latest changes in the company but does not take days to prepare. This is important both for you and investors — they are more interested in the project's development than in multi-page reports.

Here are some tips on how to make the process as straightforward as possible without losing valuable information and wasting time:

Create an easy-to-edit template. Decide which main blocks will be included in this template, for example, Timeline, Marketing, Data & Metrics, Finances, Product, Sales, Ups, and Downs, etc. Avoid filler — mention only essential items, point by point.

Make a video. Do not waste time crafting a large presentation or a text document. Use the template mentioned above to share crucial info on the latest developments. You don’t need a fantastic camera and stage for this — just use your smartphone.

Be honest. Do not try to deceive your investors. If the month was unsuccessful, say so. Point out the mistakes you have made and articulate their potential consequences — that’s normal since we all make mistakes from time to time. Show your investors that you recognize the issues and explain what you will do to fix them. If you have a request, tell your investors about it.

Submit your monthly report at the same time without any gaps. Send it under the title "Report for month X,” and be disciplined since you will know that your investors are waiting for your report on a specific day of the month. If you skip some months, investors may think that you are an unreliable person or that your company is facing difficulties.

Conclusion

It’s great that you have managed to find an investor. It’s even better when your agreements with them are transparent and understandable, and your relationship is based on mutual respect and benefit. It’s not so difficult to achieve a successful deal: put yourself in the investor’s shoes, understand their logic and expectations, get a good lawyer to formalize your agreements, talk through all complicated points before you sign the contract, and keep the investor informed of your current activity. You should have a great partnership with your investor if you follow this advice.

We're ready to help you find video game funding by connecting you with an investor, and we can guide you through this process. Apply today to join Xsolla Funding Club, a no-cost matchmaking service for developers, investors, and publishers. One application gets your game in front of hundreds of qualified investors, plus an expert team to help you along the way. Any questions? Send an email to funding-club@xsolla.com.

*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

So, you've found an investor who is ready to put money into your studio or project. Now's the time to put your relationship on paper to avoid possible future complications in your video game funding. You should be well-informed ahead of time to ensure that your cooperation is mutually beneficial.

This article will explain what to expect from a deal, which points to consider when signing a contract, and how to prepare good reports.

If you're still seeking an investor, see our detailed article outlining how to find a potential backer.

What You Need to Know About Investors

Before focusing on contracts, penalties, and termination clauses, you should learn the basics of investment principles — in other words, what investors are looking for. This will help you go into the situation with expectations about both sides and how you can find common ground.

The Investor Is Your Partner, Not Your Friend

While you've invested your energy, ambition, and care into your game and its gameplay, an investor has other priorities. Their only goal is to get the desired rate of return on their investment. Keeping this in mind throughout your dealings will help you focus on a professional relationship and prepare you to remove unnecessary emotions from the equation.

An Investor Always Strives for Efficiency

An investor is ready to make decisions that you may find cold and calculating to maximize profits. For example, they may fire part of the workforce once they finish their work and the need for their services disappears. This does not characterize the investor as a bad person — their principles can simply differ from those of developers. You may want to build a successful company where employees are happy, your brands are famous, and your games are critically-acclaimed. While an investor simply wants to see profits and a sizable profit.

Just Like You, an Investor is Interested in a Profitable Project

During difficult times, or when you face issues you're not yet experienced enough to handle, an investor can help. Perhaps they are not good at game development (especially if they are not a specialized investor), but they typically know how to do business. Therefore, their advice could be beneficial. Don't miss the opportunity to use their help to learn new skills and grow your knowledge.

What to Keep in Mind When Making a Contract

The most unpleasant situations often arise from poorly crafted contract documents. Make sure to spell out all the details of your relationship with the investor on paper. This guarantees that you will get your money, receive it on time in a pre-defined quantity, and retain ownership of your company.

For example, your investor promised not to interfere in the company's operational management. However, they may decide to change the CEO during a problematic situation since their stake in the company contractually provides them this right — now your studio is governed by someone else.

Before signing a contract, you should work on all areas that may lead to difficulties. You will certainly need a qualified lawyer at this stage. If you can't afford an internal legal resource, outsource one from a law firm. While expensive up front, you won't regret the support of proper legal counsel. A lawyer will help you correctly formulate your agreements on the main blocks of your deal.

Here’s a list of the main points that you should pay attention to when you sign a contract:

Financial Terms

These terms will define the financial scope of the partnership, such as the amount of compensation due to the investor, how payments will be paid out, what happens in case of breach of contract, and so on. 

Project financing
Define the main terms regarding the investor’s obligations, including the number of payments, their size, and timing.

The size of paid-in capital, contributions of participants of the deal, and investor’s stake
This is necessary to understand the rights and obligations of the deal participants. In particular, this point will clarify which rights your partner gets by acquiring a specific stake in your project.

Investors’ liabilities for breach of contract and failure to fulfill financial obligations
Decide which sanctions are provided, what you get in case of contract violation, whether the investor loses their share of future profits, etc.

Possibility of second-round financing
A project often needs an additional investment stage (a so-called ‘investment round’). That’s why you should understand whether the current investor will deliver additional funding or if you will have to find new partners in advance.

For example, an investor could finance the creation of the prototype in exchange for a stake in the company. The next move in the traditional development cycle is to find a publisher. However, the prototype may show significant results, so the company may decide to maximize its profits and skip searching for a publisher to increase investment in development and marketing.

Distribution of income
Is your priority to develop the project or repay existing investments? In what proportions will the projected income be distributed? Do you take overhead and operating expenses into account when distributing income? These details can differentiate between solid earnings and an attempt to survive until the end of the month.

Investor rights in making management decisions
You should clearly understand the investor's potential actions and the questions that you will be obliged to coordinate with them.

Investor payments, for example, interest on the loan
If the investor’s participation in the company is formalized in this way, such payments may be taken as a kind of "insurance" for their investments.

Business Project Management

Having reached an agreement on financial issues and distribution of income and stakes, you may be sure that you share the same strategic picture of your partnership. Now, you are ready to proceed to the second important block of the deal.

Investor’s role in the company
Even if an investor has the right to participate in business processes, this right should be realized — not every investor will use it. You have to first agree whether intervention in management procedures will be a constant process or whether they will limit it to periodic checks and proposals. Also, an investor can leave out this burden and remain an external observer.

Company CEO
Perhaps the investor will decide that your management experience is insufficient. You’ll agree on a more suitable candidate for the CEO role, providing you with more time for game design or marketing.

CEO rights
Here we’re talking about the rights that come in addition to those due to a CEO by law. Determine which decisions the CEO can make alone, which ones must be discussed with other team members, and which decisions are outside of the CEO’s scope.

Unanimous decisions
Typically, these include the most critical decisions, which have the most severe potential consequences for the company.

What to do if one of the partners disagrees with the majority opinion
Do your partners have a "veto right"? Are decisions made by a qualified or straightforward number of votes? What will you do if you cannot reach a consensus?

Exit

You should formalize all the above issues to protect yourself from (potentially) unfriendly moves. Even the most talented entrepreneurs can lose control of their company, and your task is to do everything to avoid this. Among other things, you should work on the issues associated with the exit from your venture. Exit terms should be discussed when you negotiate the contract to protect yourself from a sudden loss of both partner and investments. The more problems you solve in advance, the easier your work will be in the future.

Exit terms
Determine the exact terms and include scenarios when partners’ obligations are fulfilled in full or in part.

Will existing partners have a priority right to buy stakes of former partners or investors?
Usually, developers try to include this condition in the contract. It obliges the investor to provide the developer with the opportunity to purchase their stake if they want to exit from the project.

Will partners have restrictions on selling their stake? F
or example, you should determine whether your investor has the right to sell their stake before they make the final payment or if the developers can bring other investors to the project by providing them with a part of their stake.

Partners’ Responsibility in Case of Breach of Contract

Do partners have the right to carry out similar activities in other companies? This is an important point, especially in the game industry, where company employees are often prohibited from working on personal projects if they are in the same field as their main job. Also, should the investor be able to put money into your company’s direct competitors? This point will be handled differently on a case-by-case basis.

How To Formalize Your Relationship With an Investor

Having agreed on all the conditions, you will be able to spell out all the terms and choose the appropriate form of your cooperation. Here are three of the most popular options:

Investor Gets a Stake in the Company

This happens when the investor gets a share in the company in exchange for their investment. In this case, the investor acquires the right to participate in the firm's management. During the negotiation stage, you should discuss how this participation will be implemented and then write down the specific terms in the contract.

In particular:

  • Indicate how management responsibilities are divided between partners.
  • Determine the powers and limitations (if any) of the company’s CEO.
  • Decide how the company income will be distributed between partners.
  • Indicate whether partners’ heirs will have rights to their stakes in the company.
  • Define exit terms.

Investment Contract

Suppose the investor is not ready to acquire a stake in the company. In that case, the simplest way to formalize your relationship is to craft an investment contract in which you will define the issues mentioned above.

This document confirms the most fundamental agreements of the contract’s parties. The investment contract includes the details of the financing process, parties’ obligations, nuances of management structure, and options for resolving potential conflicts. At its core, an investment contract is an instruction on the stages of project development that signatory parties should complete.

Loan Agreement

This is an alternative way to formalize your relationship with an investor who will not participate in the project's life. However, this agreement has a significant drawback - it is not directly related to the project, especially in terms of business management, and your verbal agreements will differ from written ones. In case of failure, you will have to return the money. At the same time, the investor will not get big profits even if the project is successful.

In this light, the optimal option is to sell a stake in your company or enter into an investment contract. In both cases, you will be able to write down any verbal agreements for the parties. This approach will provide you with a better chance to balance the result with the partners’ expectations, which increases satisfaction from your cooperation and saves money on litigation.

Investor Reporting

If you have successfully signed a contract and resolved all issues, your relationship with the investor becomes understandable and straightforward. To keep it this way, contact your investor at an established regular cadence — monthly is standard — and report on your progress even if the next investment tranche is far away. There are several reasons for this:

It’s the right thing to do. Investors count on you. They gave you the money to make a profit, and they want to be sure that you spend the funds wisely and ensure your words do not diverge from your deeds.

A lack of news is alarming. You have given money to someone, but the company remains silent. What do you think? Something bad happened? Is the project bankrupt? The project owners took the money and disappeared? Communication is key.

Problems should always be reported. You will undoubtedly face problems — and you’ll need help from investors. They may assist you with advice and additional funds. Also, you may enter a waiver agreement in case you need a new investor. However, investors must know the actual state of things and the dynamics of changes. Who would you want to help — a company that took your money and stayed silent or a studio that gave you constant updates every month?

How to Create an Effective Investor Report

An excellent report provides a clear and straightforward view of the latest changes in the company but does not take days to prepare. This is important both for you and investors — they are more interested in the project's development than in multi-page reports.

Here are some tips on how to make the process as straightforward as possible without losing valuable information and wasting time:

Create an easy-to-edit template. Decide which main blocks will be included in this template, for example, Timeline, Marketing, Data & Metrics, Finances, Product, Sales, Ups, and Downs, etc. Avoid filler — mention only essential items, point by point.

Make a video. Do not waste time crafting a large presentation or a text document. Use the template mentioned above to share crucial info on the latest developments. You don’t need a fantastic camera and stage for this — just use your smartphone.

Be honest. Do not try to deceive your investors. If the month was unsuccessful, say so. Point out the mistakes you have made and articulate their potential consequences — that’s normal since we all make mistakes from time to time. Show your investors that you recognize the issues and explain what you will do to fix them. If you have a request, tell your investors about it.

Submit your monthly report at the same time without any gaps. Send it under the title "Report for month X,” and be disciplined since you will know that your investors are waiting for your report on a specific day of the month. If you skip some months, investors may think that you are an unreliable person or that your company is facing difficulties.

Conclusion

It’s great that you have managed to find an investor. It’s even better when your agreements with them are transparent and understandable, and your relationship is based on mutual respect and benefit. It’s not so difficult to achieve a successful deal: put yourself in the investor’s shoes, understand their logic and expectations, get a good lawyer to formalize your agreements, talk through all complicated points before you sign the contract, and keep the investor informed of your current activity. You should have a great partnership with your investor if you follow this advice.

We're ready to help you find video game funding by connecting you with an investor, and we can guide you through this process. Apply today to join Xsolla Funding Club, a no-cost matchmaking service for developers, investors, and publishers. One application gets your game in front of hundreds of qualified investors, plus an expert team to help you along the way. Any questions? Send an email to funding-club@xsolla.com.

*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

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