Stock Options and Revenue Sharing in a Game Development Studio: How to Distribute Revenue and Equity Among Team Members

A game development studio may spend years developing a product without generating stable profits, so the promise of an equity stake or a percentage of future sales often becomes part of team motivation. Problems begin when the phrase «you will receive 5% of the game» fails to answer basic questions: 5% of what exactly, for how long, under what conditions, and what happens if the specialist leaves before release? To avoid disputes, it is necessary to choose an economic model first and only then formalize it legally.

Three Different Instruments That Are Often Confused

A stock option is not the same as an existing equity stake, and revenue sharing does not necessarily make a person a co-owner of the company. These differences affect voting rights, access to information, taxation, the consequences of selling the studio, and the ability to attract investors. The choice of instrument should depend on the objective: retaining a key developer, rewarding a co-founder, or sharing the commercial success of a particular game.

When Are Stock Options Suitable for a Studio?

A stock option plan is useful when a team wants to link a specialist’s future equity stake to continued employment and the fulfillment of agreed conditions. It is important to define the size of the potential ownership interest, the period and procedure for exercising the option, the purchase price of the equity stake, required corporate approvals, and the consequences of an investment round. The mechanism depends on the law of the country where the company is registered: a template American stock option agreement cannot simply be applied to a Polish sp. z o.o. or a Cypriot Ltd. without adaptation.

Vesting and Cliff

Vesting means the gradual acquisition of rights to the agreed compensation according to a schedule, while a cliff establishes an initial period before the end of which the right generally does not arise. For example, the parties may agree on a four-year vesting schedule with a one-year cliff, but this example is not a universal standard: the duration, conditions, and permissibility of the mechanism must comply with corporate law and the contractual structure.

Good Leaver and Bad Leaver

The plan must define the consequences of a participant’s departure. Termination initiated by the company without misconduct, voluntary resignation, a material breach of obligations, and the participant’s death may require different rules. It is particularly important to specify what happens to rights that have already vested, rather than relying on a vague provision stating that «the option is canceled upon termination».

Revenue Share: Participation in Revenue Without Transferring Equity

Revenue sharing may be suitable for a game designer, composer, producer, or key developer whose work significantly influences the commercial performance of a particular game. Such an agreement allows compensation to be linked to project revenue without granting the participant corporate rights. However, a simple phrase such as «10% of profits» will almost certainly raise questions in the future if the parties have not defined how income and expenses are accounted for.

• Scope: a single game, a specific version, a series of games, or the studio’s entire catalog.
• Calculation base: gross revenue, net revenue, or another metric with an exhaustive list of deductions.
• Period: when payments begin to accrue and how long they continue, including after the participant’s departure.
• Reporting: frequency of calculations, supporting documents, and the right to verify the data.
• Special events: refunds, discounts, publisher commissions, sale of IP, discontinuation of the game, and closure of the studio.

How to Calculate Payments When a Game Has a Publisher

If the studio receives money through a publisher, it is necessary to understand which amounts the developer actually receives after platform commissions, advance recoupment, and other deductions. Revenue sharing calculated on store sales and revenue sharing calculated on the studio’s actual receipts may produce fundamentally different results. Therefore, the incentive agreement must be aligned with the Publishing Agreement and the actual flow of funds.

What Happens When the Studio Is Sold or Receives Investment?

An investor examines the capital structure, obligations to employees, and the existence of agreements that continue to reduce revenue after the transaction. If team members have been promised perpetual equity stakes or royalties, a buyer may demand that the terms be renegotiated or take these obligations into account when determining the purchase price. For stock options, the consequences of a change of control should be defined in advance; for revenue sharing, it is necessary to establish whether the obligation continues when the game is transferred to a new rights holder.

Common Mistakes Made by Founders

The most costly mistakes involve verbal promises, the absence of exit provisions, and confusion between corporate rights and contractual payments. It is equally risky to issue identical agreements to all specialists without considering their contributions and the duration of their involvement. An incentive plan should be understandable to participants and compatible with future investments, rather than simply appearing attractive during recruitment.

How to Formalize a Team Incentive System

Start by mapping out the participants and objectives: who should become a co-owner and who should receive a bonus based on the performance of a particular game. Then choose the applicable model, agree on financial definitions and exit scenarios, and review the corporate, tax, and employment law implications in the country where the studio is registered. Wolja Digital develops stock option plans, shareholders’ agreements, and revenue-sharing agreements, taking into account the company’s structure and planned transactions.

How to Calculate Revenue Share to Avoid Disputes After Release

Imagine that a studio promises its lead developer 5% of the game’s income. If the agreement does not define the word «income», the parties may have different amounts in mind: user payments before the store’s commission, money remaining after the platform’s commission, receipts after recoupment of the publisher’s advance, or profit after all expenses. The difference is particularly noticeable for games with extensive marketing, multiple platforms, and seasonal discounts. Therefore, a revenue-sharing model begins not with the percentage but with a precise definition of the calculation base and a list of permitted deductions.

The next question is the duration of participation. A share of revenue may accrue only during the period of work on the project, continue after the specialist’s departure, or terminate in the event of certain breaches. If the agreement is indefinite, the studio should assess the impact of this obligation on the sale of IP and future investments. If participation ends immediately upon termination of employment, a key employee may consider the system unfair, especially when most revenue is generated after release. The terms should be agreed upon before significant receipts begin to arrive, while the parties’ negotiating positions are not yet influenced by the game’s actual commercial success.

Finally, reporting and payments must be defined: calculation frequency, currency, publisher and platform documentation, procedures for correcting errors, access to data verification, and taxation of the recipient. If the studio receives funds from the publisher with a delay, the agreement should distinguish between accrual and actual payment. It is also necessary to determine separately whether participation extends to DLC, ports, sequels, and the sale of the game to another owner.

Stock Options, Vesting, and Corporate Events

A stock option plan serves a different purpose: it provides an opportunity to acquire an equity stake in the company upon fulfillment of agreed conditions, rather than a right to a fixed percentage of receipts from a particular game. Therefore, the first step is to determine which company the plan applies to, what corporate approvals will be required, and how the acquisition of the equity stake will be formalized. In an international game development structure, developers may work in one country while the IP and holding company are located in another, making a universal stock option template particularly risky.

Vesting spreads the acquisition of rights over time or links it to the achievement of specific results, while a cliff may establish an initial period without a definitively vested interest. These mechanisms must be aligned with the rules governing a participant’s departure. For example, voluntary resignation, termination of cooperation due to project downsizing, and dismissal for a material breach do not necessarily have to result in the same consequences. The terms good leaver and bad leaver are useful only when the parties clearly understand the grounds for classification and the procedure for valuing the equity stake.

When attracting an investor, the plan may affect the company’s capitalization and distribution of control. The investor will examine how many equity stakes have already been promised, who is entitled to receive them, whether an additional issuance of shares is required, and what happens if the company is sold. If agreements with different participants contradict one another, a conflict may arise precisely at the time of the transaction. Therefore, stock option arrangements should be reflected in the cap table and aligned with corporate documents in advance.

Frequently Asked Questions

Does Revenue Sharing Grant Voting Rights in the Company?

Generally, no, provided that the parties establish a contractual right to payments rather than an ownership interest in the company.

Can a Stock Option Be Revoked Upon Termination of Employment?

The consequences depend on the terms of the plan, rights that have already vested, and applicable law. The rules must be defined in advance.

Which Is Better for an Indie Studio: Equity or a Percentage of Revenue?

If the objective involves business management and a long-term partnership, an equity stake may be considered. If the goal is to reward contributions to a particular game without changing the company’s capital structure, revenue sharing may sometimes be more convenient.