You Should Get a Lawyer
A friend of mine told me that most independent game developers refuse to acquire legal counsel for a variety of reasons. These reasons range everywhere from prohibitive costs to intimidation to fear of getting too wrapped up in the "business end" of things. This obviously creates a few problems if you seriously plan on doing business. Think of your legal matters (i.e. contracts, negotiations, accounting, litigation) in terms of programming. Would you be able to write a full game after only reading one or two websites on coding? Would you be able to fix bugs without knowing the programming language? Would you be able to make your own game by relying entirely on someone else's code, without knowing what that code does? I'm stretching the metaphor a bit, but by now you should be getting the point—there's a reason lawyers exist, and that reason is to help you navigate the legal mine field you're walking into when you do business.
In this post I'm going to try to dispel some of the myths and fears that seem to surround the legal profession. I'm also going to give some general good advice on how to determine whether your lawyer is a good fit.
Myth #1: I can't afford to pay a lawyer
Simply put, if you can't afford to pay a lawyer to look over a contract, you shouldn't be doing business. Lawyers want to help you. Some lawyers will review a contract for free or for a reduced rate if you inform them of your financial situation. Others will agree to do the work in exchange for a percentage of the deal. Still others will agree to a reduced flat fee. Many permit payment via installments, and several firms and solo practitioners now take credit cards and alternative methods of payment. The cost of having a contract reviewed is a cost of doing business; just as purchasing certain software is a cost of game development.
Myth #2: I can do it myself
Representing yourself has several drawbacks. First, you are probably inexperienced with legal documents. You may not understand the strategy of choice-of-law, the benefits of arbitration, the breakdown of royalties, and the nuances of intellectual property law both domestic and international that all play significant roles in game contracts. You probably aren't terribly familiar with your available remedies in a breach of contract versus a material breach of contract. You're probably confused by a lot of the boilerplate that exists in contracts—don't worry, you're not alone. There are many attorneys without transactional experience who aren't aware of why certain provisions exist in a contract. A good attorney, however, will know where to get the answer. The attorney you want is one who can explain why that language exists and more importantly, can change the language in a way that benefits you; otherwise he or she can at least point out why the language poses a risk to you.
Second, it's unprofessional. Honest, experienced business people understand the necessity of lawyers. They anticipate lawyers in the negotiation process. They expect agreements to be reviewed by competent, diligent counsel, and if you show up without an attorney, you are at a distinct disadvantage.
Third, and on a related note, honest, experienced business people have lawyers, and will expect you to have a lawyer. Anyone who suggests that you shouldn't get a lawyer or that lawyers will only "complicate things" is very likely trying to screw you. Be very wary if the person you're contracting with tells you that you don't need a lawyer. They are either inexperienced or they have every intention of taking advantage of you.
Myth #3: All lawyers are evil
I've heard this one a lot, and I really think that many people believe this. Everyone has a lawyer horror story or has more than likely heard a lawyer horror story that they feel bears repeating.
There are honest lawyers. They love what they do, they have a passion for their work, and they aren't in it strictly for the money. The legal profession is first and foremost a profession, and people who go into it for the money don't last long. Simply put, practicing law requires discipline, dedication, love, and a desire to help others. Without those basics a lawyer will be very dissatisfied with their chosen profession. There is a lot of heartache, disappointment, injustice, unpaid fees, and politics that lawyers have to put up with. If they don't love what they do, you'll probably know the moment you meet them. They give off a distinct air of "I don't have enough time for you and I'd rather be doing something else." Otherwise they'll spend more time talking about what they can do for you instead of learning what they can do for you by listening to what you have to say.
Simply put, lawyers are people. They have hobbies, friends, relationships, and families, most of which come second to their profession. They are not all business suits and sleaze. Granted, there are plenty of bad lawyers out there who have manifested in the horror stories you've heard— but every product or service produces its own brand of garbage, lawyers and game developers being no exception to the rule. The best way to avoid bad lawyers is to check out their product—ask the lawyer for previous clients who can provide a reference. From the client list provided you can determine 1) whether the attorney will have time to manage your workload; 2) whether the attorney has experience with your type of product and; 3) obviously, whether (s)he's any good. If you've picked up a new/young/fresh after the bar attorney, ask for information regarding former employment, mentors, etc.
Remember that you must rely on your lawyer. Good lawyers want you to feel comfortable trusting them, will trust you, and will actually care about you and your business. A good lawyer is your priest, your therapist, your defender, your confidante, and your most honest friend. They're a bit like house elves, actually—they keep your secrets while servings your needs. They're just slightly better dressed.
Myth #4: All lawyers are naturally adversarial
This is a myth with some seeds of truth to it. Attorneys are advocates. They are obligated to zealously defend their clients in court. Some attorneys take this zealous spirit to the negotiating table, where it is sometimes less effective. Deals can fall apart when a lawyer puts his own ego before his client's needs. It's been known to happen, and the best way to avoid it is to know your attorney and know his or her reputation. You want your attorney to go to bat for you—you don't want your attorney to hit the person sitting on the other side of the negotiating table in the teeth with said bat.
Only 2% of civil cases go to trial in the US. Most cases are settled out of court. Settlement requires that the parties settle on what is tantamount to a contract. Lawyers, regardless of their chosen practice area, are primarily negotiators. They may argue vehemently for their clients in memoranda of law to the courts prior to going into settlement, but once they enter into settlement negotiations, the goal is to reach a decision that both parties can stomach.
Transactional and entertainment attorneys are probably better suited to deal with the particular contracts you will have to deal with. However, it is also important to note that a good lawyer will avoid litigation, but will not be afraid to litigate if necessary. Oftentimes you will need an attorney experienced in litigation when your rights are infringed upon or when you're being sued.
The bottom line is that your attorney must be aware of your needs. They must know what you want and need out of a deal, what you as the client will and will not accept. While an attorney should zealously attempt to get the best deal possible, an attorney who lets his or her own ego or adversarial nature get in the way of a perfectly good deal is a huge liability to your business.
In any business relationship, the best advice I can give you is to know who you're dealing with. This is true for lawyers, business consultants, financial consultants, accountants, and publishers. This is especially true for your lawyer. A good lawyer will explain the terms of the contract to you in detail. A good lawyer will return your calls within 2-4 hours, or at least within the same day. If they don't, they'll e-mail you or find some other way of getting in touch with you to let you know the status of your case or deal. They will let you know how they spend their time, and they will provide you with documentation, research, memos to justify their fees. A good lawyer will find a way to make representation affordable. Most of all, a good lawyer will look out for your best interest and will be in a position to protect you in ways that you are not able to protect yourself.
- Note: This is a slightly biased slant, because I work for and know some truly excellent, ethical, and gifted lawyers, and they've set the bar for the type of lawyer I want to become.
Hiring for your Development Company
In the beginning, most independent developers don't think about hiring employees. Much of the work is done on an independent contractor basis, and the projects are small enough to not require additional labor. However, once you earn a reputation and you begin pulling down more projects, you may find that hiring additional employees is necessary to manage your workload.
Employment and labor law differs from state to state, country to country. Workers' Compensation, employee discrimination, and sexual harassment are all very serious issues that employers have to consider when setting up their business. There are also other logistics, such as managing payroll and tax withholdings that may require additional software or accounting to ensure state and federal tax compliance. If you are considering hiring employees, it's always smart to consult an attorney that is versed in employment and labor law. Failing to do so could lead to failure to comply with certain jurisdictional guidelines. Furthermore, lawsuits by disgruntled former-employees can create serious problems for developers and can often be avoided if certain quality of life and human resource issues are addressed prior to the hiring process.
The following checklist has been adapted to address issues peculiar to developers.
1) Get your tax information squared away.
This means a) filing an SS-4 for your EIN for federal taxes, b) registering with your state's labor department to pay unemployment taxes, and c) set up a payroll system for state and federal withholdings. Turbotax is a great program for setting up payroll tax withholdings and is the one currently recommended by accountants. To determine what forms you will need to file come tax season, visit the IRS website (federal) and the FTA (state) for more information.
2) Get insured
Employers are required to carry workers' compensation insurance to cover on-the-job injuries. You have to comply with your state's guidelines when you file for insurance, and you can typically do so in one of three ways—self-insurance, state-administered insurance plans, and private insurance. To get insured, first figure out what your state requires and/or permits. Next, do your homework and determine which option is best for your purposes.
3) Develop Safety and Quality of Life Guidelines
Companies are required to comply with OSHA (Occupational Safety and Health Act), which sets out the baseline requirements to ensure the safety and health of your employees. Health and Safety becomes an issue for developers when you're dealing with a lot of computers in a small space. There is the possibility of fire, electrical outages, electrical shock, improper grounding, spills, and various other risks and hazards that must be addressed. You must also comply with any applicable municipal building codes. Make sure your electrical wiring is up to date and provide employers with guidelines for how to properly handle certain situations. Make sure your fire alarms are all fully functional, and have appropriately spaced and well-marked emergency exits in your place of work. You may also be required to admit the fire marshal to ensure building code compliance, so be sure to notify your employees on the day she or he will be in the building.
4) Comply with Department of Labor posting requirements
Visit the DoL website to determine what information and notices you need to provide to your employees. You are required to inform them of their rights under federal (and some state) law. Make sure to comply with the posting requirements as well.
5) Create Personnel Files
Every employee should have their own file that contains their application, their signed NDA, their resume, other work related documents, their I-9 and their W-4. The file may also include employee evaluations, complaints, and other information relevant to their employment. Any medical information MUST be kept separate from the main file and locked away due to HIPPA and state health care privacy laws. Disclosure of any health care related information could lead to both civil and criminal sanctions depending on your state's laws.
6) The employee handbook
Your employee handbook should describe office procedures, complaint reporting requirements, sexual harassment policies, anti-discrimination efforts, disciplinary measures, and confidentiality requirements. It should describe how you want your employees to behave. It should also describe your goals as a company and your standard business practices. It is important to enforce your disciplinary procedures, particularly in the areas of confidentiality/non-disclosure to maintain protection of trade secrets. You may also want to describe any employee benefits that employees can apply for if you've taken steps to provide a 401(k) or health insurance policies to your employees.
7) Annual reporting
You need to fill out a form 940 or a form 940-EZ every year for your federal unemployment tax. A form 940 is required if you are required to pay unemployment taxes in more than one state or if you failed to pay all of your unemployment taxes by January 31 of that year. Otherwise you may fill out the 940-EZ. You are also required to pay those taxes you withheld in you employees' paychecks. These withholdings account for federal income taxes, medicare taxes, social security taxes and FICA. You can find all of the appropriate federal filing information at the IRS website. In particular you will need to fill out forms 941, 943, 944, and an annual W-2. A copy of the W-2 must also be provided to employees. Note that these are just for your federal tax filings. You must also comply with state tax filings.
Caveat: A lot of developers hire programmers and designers from other countries. If those employees are relocating to the United States, they MUST obtain the proper work visas and fill out an I-9 form. For more information on I-9, visit the USCIS website.
With each new employee that you hire, you must do three things:
1) Notify your state's employee reporting agency;
2) Every new employee must fill out an I-9 to show that they are allowed to work in the U.S. This is required for both US and non-US citizens.
3) Have the employee fill out a W-4 and withholding allowance certificate.
The Finer Points of Starting your Development Company [Part III]: Formation
Before You Get Started:
Before you start sending out applications and visiting city hall, you need to determine what kind of business you want to set up. To do this, you will want to take your business plan, including your financials, to both your attorney and your accountant. You may also want to consult the helpful volunteers at SCORE and SBA, as they work with quite a few start-ups. Your attorney will want to insulate you from as much personal risk (to the extent that you are exposing your personal finances to personal risk) as possible, while your accountant will want to ensure that whatever entity you elect will get the best tax treatment possible. They may recommend that you fully incorporate (if you require investors and shareholders, and you require substantial start-up capital), or they may suggest one of the other "limited liability" entities at the beginning stages of your company. The checklist below is for the formation of an LLC. While the formation of business entities is on a whole fairly uniform, if you elect to organize as another entity you must a) first make sure that your state recognizes such entity as a valid business form, and b) comply with all local, state, and federal rules and regulations with regard to business formation. Therefore it is always helpful to have a lawyer at this stage in your business planning. Another question you want to ask yourself is where you want to register your entity—while it is typically problematic to organize your small business in a state other than your principal place of business, some states such as Delaware offer tax incentives for entities who register there. Many states do not require that the business members or board live in the state where the entity is registered. A post office box under your business's name may be sufficient. Keep in mind that your business entity is distinct from you (depending on the entity), and your entity can legally exist in two places at once (where it is incorporated and where its principal place of business is).
LLC Checklist (note: the following applies to business entity creation in the US. Businesses that wish to operate in foreign countries should consult legal professionals in your region):
DBA (Doing Business As): Any business that uses a trade name or name that differs from the name that appears on the Articles of Organization must obtain a DBA. This is the name you want your company referred to in contracts, bank statements, and other transactions and investments. Many banks require that you provide your DBA prior to opening a business account. DBA's have an added benefit for LLCs in that they allow game developers to use a different DBA for each game or website they create without forming an entirely new entity (there may be other reasons to organize each game in development as a separate business entity, however—this is something that will be discussed in later entries). You can have one LLC and multiple DBAs.
Obtaining your DBA varies from state to state, county to county, and country to country. If you are located in the US, you may want to the contact the office of your Secretary of State or the County Seat to determine how to obtain a DBA. If you are in another country, contact your local authorities (starting at the city level—i.e., city hall, mayor's office-- and working your way up) to determine how to obtain the proper registrations.
Articles of Organization: Your Articles of Organization have serious legal consequences, and should therefore be drafted by or with the assistance of an attorney. Similarly, you must be very careful that your Articles of Organization and your business's Operating Agreement do not contradict one another. Your Articles of Organization may include:
a) Your business's name and principal location,
b) The duration (or how long you expect to be in business to operate),
c) The business's purpose,
d) The name and address of the Agent of the company (individual assigned to receive service of process and other legal documents),
e) The initial Capital invested by the company and its members,
f) Division of Ownership of the company,
g) Winding up/Termination of the Company,
h) Management of the company—i.e., who is in charge of what,
i) Indemnification clause, stating that the entity indemnifies its individual members as to all claims arising from doing business.
The requirements for the Articles of Organization may vary from state to state, country to country. It is in your best interest to consult a lawyer familiar with setting up small businesses.
Operating Agreement: Your operating agreement will set out the finer points of your company's management, finances, organization, and ownership structure. This is an agreement between the members of the company that sets out how the company is to operate. As a result, it will vary drastically from company to company. As noted above, it is very important that your operating agreement does not contradict the Articles of Organization—a contradiction may cause your operating agreement to be voided unless the particular contradiction is severable from the rest of the agreement. Once again, a lawyer is very valuable at this stage.
Federal Registration: As a business with salaried employees, you will need to obtain Federal Tax ID number and an EIN (Employer Identification Number). You can obtain the forms for these ID numbers at the IRS business portal.
State Registration: You will also need to register with the state where you plan on organizing. Note: This can get tricky if you are registering in a state other than your principal place of business. Before making that decision, consult an attorney and make sure it is in the best interest of your company. Also, read the "miscellaneous issues" section of this IGDA article. To register with a state, you typically need to provide a registration form, a registration fee, and a copy of your Articles of Organization.
County Registration: In many states, you may be required to register your business in the county where you plan on operating. To do this, you need to visit your county seat/satellite office or go online to fill out the registration form. As this may also be the place where you register for your DBA, you may be able to accomplish these tasks at the same time. Different counties have different rules—some may require your Articles of Organization while others do not.
Municipal Registration: You must register as a business within the city where you plan on doing business. This usually means a trip to city hall/town hall or your local court house to fill out the requisite application forms.
Keep in mind that you are accountable for Federal, State, County, and local/city taxes. All of these registrations are almost entirely for that purpose only. However, some locations have specific regulations. Most of the offices where you register will provide you documentation of those specific rules and regulations. If they do not, it is your responsibility to educate yourself about the rules and regulations that apply to your business. As an LLC, you can elect how you want to be taxed-- whether as a sole proprietorship/partnership, a C Corp, or an S Corp. How you want to be taxed depends entirely on your business's needs, and you should always consult an accountant when making this determination.