This article addresses the depth to which a prospective owner of a new entertainment software company should go in covering all of the bases before starting-up. My target audience is the impassioned – but still impressionable – young game developer, with 2-3 years of experience, who is attempting to build a start-up in order to do things the right way and “stick it to THE MAN.” Also interested should be the older, more established person hailing from an entirely different sector of the greater entertainment industry, brimming with original intellectual properties and eager to have them successfully converted into video games.

This article can also be considered an addendum to my previous foray into this topic, “Transforming the Games Industry into a Well-Oiled Machine: Building Your Own Game Development Studio.”

The Top 10 Things I Have Assumed About You

01 – You (an impressively patient, thoughtful-yet-decisive leader) and your loyal cadre of game developers have created what you believe is an airtight business model for your start-up.

02 – You created a collection of your very best game design documents in order to determine for which game product types, genres, and hardware platforms you want to develop.

03 – You spent some time evaluating various development technologies and production software (for creating and compiling of a wide range of code, visual, and audio assets) – as well as applications for source control, task-tracking, and bug-tracking – and you determined the best licenses and open source choices for your product.

04 – You selected one game type, one genre, and one target hardware platform for which you and your team very much want to make a product.

05 – You consulted people associated with games industry marketing, manufacturing, and distribution channels (both traditional and virtual), and you have a general idea of how you want to sell your product.

06 – You estimated a cost (of X in U.S. currency over X months or years) for studio operations, commercial technology, production software, and product development using in-house and external resources . . . from concept-to-completion and distribution-to-delighted-customers.

07 – After dialogues with a few potential (possibly recommended) funding sources, you have settled on one.

08 – You have disclosed your requirements, and your funding finalist is performing a thorough risk assessment against your plans and the requested figure.

09 – You have made some effort to define how you will split your time between managing your company and the development of your product.

10 – You and your buddies want to be in charge of your careers for a long time – making original, innovative, and enjoyable games your way, and “sticking it to THE MAN” (or "the establishment" who would ever dare to prevent delivery on your majestic goals).

You seem pretty sure that you are on the right path and have generally considered everything on the eve of your first big deal. You are just itching to sign up, collect your cash, and get this party started. The devil, however, is in the details. I may have just enough (subjective-yet-experience-based) material here to prevent you from falling prey to any big time “gotcha’s.” Right out of the box, though, I have a helpful phrase I want you to ponder and memorize before we go any further:

“Think. Do not do things the way they have always been done simply because that is the way they have always been done.”

Never Turn Down Good Advice

People come up with great ideas every day upon which they can attempt to establish a company. A small percentage of those people actually have the nerve to do so as sole proprietors – as the responsibility level is manageable and generally only involving risk to one person. An even smaller percentage of those people have the guts to do so involving a team of employees – both internal and outsource (local or offshore) – and those people feel more prepared and interested in a greater responsibility that affects / enriches more than one livelihood. And a still-smaller percentage of those people, like you, are completely new to the business of building a business – where the electric intrigue of being your own master totally masks your understanding of the daily care and feeding a pet, err, a business may require.

This moment in your life is critical – as you are hopefully performing determined due diligence on your plans to open the next great game development studio. You are also asking some of your more trusted colleagues for their professional input, as well as recommendations for other established contacts. There are plenty of talking heads littering the games industry landscape, but you are strongly encouraged to avoid a false-start by aligning yourself with reputable consultants as early in your start-up planning process as possible.

These industry-experienced specialists hail from all of the major-and-necessary business areas a start-up may need to tap sooner or later (and in no particular order): IP (Intellectual Property) law, public relations, project management, studio management, marketing, manufacturing, distribution, finance, property insurance, property management, human resources, health benefit management, and retirement planning. You should keep in touch with these specialists before, during, and well beyond the creation of your new studio and product line. If you succeed, your needs may grow and your need to consult these specialists will expand, as well.

Whether you receive quality guidance for a fee or for free, good advice is hard to find. Just as you may wonder if a job is worth taking without first accepting that job (to expose yourself to the truth), you will never know what you might learn from an information source if you do not commit to sitting down with that person and hearing them out. If you are a “people person,” and a good judge of character in a social setting, then, you will know when you are being fed bologna or prime rib. And for the vegetarians in the audience, that would be stewed spinach or vegetable lasagna.

The Path of Greatest Reward

Achieving long-term and sustained success for your start-up begins with the path of greatest reward. The path of least resistance simply allows you to focus almost exclusively on the bottom line through cheating, cutting corners, bypassing critical internal measures, and delivering less quality (than you promised yourself and your financial partner). You think THE MAN takes this path morning, noon, and night, and you say you want to avoid that mistake at all costs. If you want to achieve long-term and sustained success for your start-up, then, follow the path of greatest reward. Your top priority will be the establishment of an appropriate compensation plan for you and your development team.

If your core team of future employees is as dedicated, loyal, and talented as you believe, then, you want to retain them as a happy and focused part of your company for as long as possible, as soon as possible. After all, how can your future team be unquestioningly all about your future products (and not dangerously distracted about what THE future paid day will resemble) if you have not reasonably been all about them first? The business of successful game development, however, involves a laundry list of interconnected moving parts which should be clearly identified and confirmed before finalizing your compensation plan and officially opening your doors for business. Failure to acknowledge those moving parts as early as possible will prevent you from properly and thoughtfully addressing the issue of compensation the first time out of the gate.

The Core Four

A handful of those moving parts provide the basis for your compensation plan, and I refer to them as the Core Four. They are stock options, performance bonuses, salary increases, and base salaries in that order of priority – from most complex to simplest. The Core Four – as well as angel investors and venture capitalists – exist for those who are not independently wealthy to the point of being able to hire whomever for whatever project to be finished whenever.

Stock options (on future equity in a company) exist as a long-term incentive for your employees to remain with and grow your company from its infancy into a mature, reliable, and successful business. The products they develop are what generate and maintain this growth, as long as those products – with some divine intervention – have been properly marketed to their target audience, forecasted sales figures for making a profit have been achieved or exceeded, and THE MAN has not artificially flooded the market place in his favor. Stock options – given in exchange for proper upfront company funding, or an employee’s willingness to go without a salary until the company reaches liquidity – can remain relatively valueless without quality, well-received products to back them up, and top-notch focused employees to build them up.

The games industry is a “what have you done for me this quarter” business, decades removed from its hobbyist beginnings. Established game companies – no matter how robust their library of popular video game properties – must continually pump out new-and-successful product in order to keep their share prices in the black. The only exception to this rule involves the still-growing, subscription-based MMO market. If you have a strong, E-rated MMO, for an enormously popular property like “Dora the Explorer,” your company’s stock could remain well into the black for years, with simple downloadable content and maintenance updates every few months.

Stock options for many people resemble the Ferrari poster on the wall. You believe you will have the car of your dreams someday, but until that moment arrives, you just admire the poster, continue working hard at your craft, and hope for the best. Stock options – for most non-corporate-giant employees – do not vest for at least the first 2-3 years of an employee's time with a company. This fact compounds the pressure on the founding members of a company to deliver one or more successful products until their vesting period has been reached.

The numerous stock option bi-laws (from common to custom) you choose to adopt will dictate under what circumstances your founding team members can activate, purchase, and keep those options. Stock options typically require significant patience by those who may not be mature or fiscally fit enough for anything less than immediate gratification. Many larger companies, in fact, have rules in place for employees who are leaving the company. The employee may be forced to sell his shares back to the company – sometimes at the original option per-share price – via a stock repurchase bi-law (in the event the employee wants to sell shares to anyone outside of the company). The bigger the corporation – and the bigger the number of outstanding shares – the bigger the lurking corporate raider who could purchase those shares towards more powerful voting rights on the future direction of a company.

Performance bonuses, for most people who have not worked at id or Epic, exist as a bridge between the potential reality of annual salary increases and the long-term desire of vested stock options that maintain a high value. Performance bonuses can be tied to successful individual tasks, departmental goals, milestone deliveries, project completions, annual employee reviews, or all of these measuring sticks.

While some companies prefer that level of granularity so that the bonus money handed out has truly been earned, most companies prefer annual reviews that conveniently adhere to their fiscal year schedules no matter when their products ship. Some companies provide bonus money the moment they notify their individual employees that a bonus has been achieved, while other companies make the notification along with an announcement that “payroll needs to be adjusted, so your bonuses will arrive one pay period or one month from now.” Some companies are kind enough to provide these rewards as cash bonuses, while other companies deliver less immediately-useful gifts under the theme “it’s the thought that counts.”

When the performance bonuses cease to fulfill their original purpose, through poor sales returns, poor development performance, or unnatural corporate meddling, salary increases can fill the gap. They act like a bonus that has been spread across the entire fiscal year, and as long as your development team, products, and sales all fall in line, salary increases should arrive annually or even bi-annually, and without fail. Any company that is appreciative of passionate but stable-minded employees in the face of the production instabilities common within the games industry will have established proper-and-reasonable base salaries for those employees, from the beginning.

The Core Four all have their strengths, and their basic difference being wait times. Salaries are immediate in most companies. Salary increases and performance bonuses can occur at least once and potentially twice per year. Stock options can potentially bring a huge windfall as long as you can afford to wait them out. Most would-be employees cannot afford to wait for their compensation. They may not have another source of income, they may have little to no savings, they may have a family to support, or all of the above. If this is the case with people you really need on your team, you should do the right thing to prevent any distractions from the critical creation of your first product.

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