Top legal tips for eSports start-ups – Part 1: incorporation, investment, IP and employees
Published 11 June 2018 By: Mike Jones
ESports is a growing sector with a great deal of excitement surrounding it. Newzoo estimated that revenues in the eSports industry would reach US$696 in 2017, increasing to US$1.5 billion by 20201, which shows the sector presents a real opportunity for start-up businesses.
The sector looks like it will continue to grow as mainstream media giants are now broadcasting eSports to millions of viewers (for example Sky and ESPN both have their own dedicated eSports content) and entertainment platforms are increasingly turning to eSports to capitalise and tap into the growing revenue streams that eSports’ companies offer2. Outside investment from international enterprises is also more common in recent times3.
As lawyers working within the eSports industry, we frequently have meetings with entrepreneurs and eSports industry veterans who have fantastic ideas for start-ups, like new competitions, teams or eSports services. As well as developing their breakthrough idea, we also work with these on the more practical and less glamourous side of setting up a business. The purpose of this article (Part 1 of 3) is to provide eSports start-ups with a rundown of some of these practical considerations that will allow them to build a sturdy base for their start-up to flourish. Specifically, it examines the following key areas:
Employees and Consultants
Parts two and three will move on to consider topic including advertising, sponsorship, data protection, events, and regulations.
The first thing you should be thinking about when considering starting up a new business in the UK is whether you should incorporate a company. While your start-up may have traded with ease as an unregistered business, there are considerable advantages for the team or organisation in forming a company.
The main benefit of incorporating a company (in the UK this is usually a private company limited by shares) is that the company itself has its own distinct legal personality, separate from you and any other shareholders. What this means is that the company will be liable for its own debts rather than the shareholders in their personal capacity. If the worst were to happen and the business fails, the greatest loss (from a company law perspective) you would be facing is the amount paid up by you in respect of the shares you hold in the company (i.e. the ‘nominal’ value of the share plus any equity investment you have provided to the company).
Setting up a company can also help to make your business more attractive and accessible to investors (see further information in section 2 below).
Costs and formalities of incorporating a company in the UK
It is important to check as early as possible that the desired company name is available at Companies House, which is the registry of companies in the UK.
All companies must have at least one shareholder and private companies must have at least one director. There are other legal matters to be considered when incorporating a company, such as the type of articles, and the rights of different classes of share. Remember, having different classes of share may have an impact of tax reliefs available to investors, so if you want to do anything complicated with your company at the point it is incorporated always take legal and tax advice first. The cost of incorporation of a company at Companies House is relatively low, with a standard fee of £40. You can commence trading under the company upon registration.
It is advisable to consult with a qualified solicitor or accountant who can guide you through the incorporation process and help you decide which type of legal entity is most suitable for your particular team or organisation.
From Microsoft to Coco-Cola, Capcom to Red Bull, the eSports sector has presented massive opportunities for investment for blue chip companies and other global brands. It’s not just the big brands who are investing: traditional sport clubs and teams such as Barcelona4, West Ham,5 and the Philadelphia 76ers6 have put money behind eSports’ teams and players as a way of engaging the youth demographic.
If your business is seeking to capitalise on this interest in the sector by raising third party funding, there are various routes available. Options may include start-up loans from the government, or investments from angel investors or venture capital funds. Investments may take the form of shares (“equity”), loans or loans which convert into equity in certain circumstances (e.g. upon the next fundraising).
Your start-up may also look to a Crowdfunding platform as a viable source of funding. Crowdfunding involves shares being offered to the public, often alongside a marketing campaign (keep an eye out on the Tube!) with the aim of hitting a financial target. However, if you are giving equity in your company away, be aware of the potential dilution to your personal shareholdings when equity is issued to investors. Thus, it is important to know from the start how much control you are willing to give away. Also consider the extent to which such investors might expect or seek contractual rights and/or protections in connection with their investment.
With traditional sports leaping into the space and advancing technologies and media brands capturing a bigger, more connected base, how can your start-up present itself in the best possible light to stand out from the crowd and attract investment?
Firstly, and most crucially, it is important to have a solid business plan and basic financial and corporate information. Make sure these can be presented in a logical and easy to follow format. If you created different classes of share when you incorporated the company or have agreed to some unusual terms with family and friends who have provided funds, be prepared to explain the rationale behind those decisions to investors.
Another practical step to consider is making sure that, when you do receive investment, you have a shareholders’ agreement (a “SHA”)in place. It is typical for the shareholders of a private company (possibly you and the other members of the team and/or the investor(s)) to negotiate and enter into a SHA. The SHA is effectively an operating agreement that regulates the governance of the company and will, among other things, outline how profits will be distributed between the shareholders. The SHA can be used to protect the interests of minority shareholders by, for example, requiring unanimous approval for certain strategic decisions of the company. It will typically also regulate the raising of capital, and the appointment and removal of directors by allowing certain shareholders to appoint one or more directors. SHAs are typically subject to heavy negotiation, which can incur legal costs. Thus, you should consider whether the timing is right for your start up and be sure that seeking the protections of a SHA does not come at the expense of the investment or the creative ideas behind the business.
Angel investors and venture capital funds are likely to have a list of key terms they would want incorporating into any investment or SHA where they are advancing funds to a company. We recommend always requesting a term sheet before work is commenced on documenting an investment to ensure that you are aware of any onerous terms before committing to a deal. For eSports companies this might take the form of an investor having a veto right over player contracts or sponsorship agreements over a certain value. Terms requested by investors are often negotiable, but consider carefully which points you feel strongly about (remember, you will need the ability to continue to run the company day to day) and which you and your company can live with in order to finalise the investment.
Having a strong brand identity is very important in the eSports space. If you are creating a start-up, part of your idea probably involves a specific brand name and a logo that you have created or have in mind.
So what can you do to make sure you are not creating a name or logo that is similar to one already in existence? Firstly, you should carry out some clearance searches, to check whether -anyone else is already using a name or logo that is similar to yours. There are various ways of doing this, ranging from very thorough professional clearance searches, to more cursory checks. At the very least, it is worth performing a trade mark search on the official trade mark registers in the territories you are planning on operating in (for the UK this would be the Intellectual Property Office7 and the EUIPO8). Although not entirely fool proof, these basic searches should give you an idea of the overall trade mark landscape, and whether anyone has registered applied a similar name or logo already. We suggest also doing a thorough Google search, which may tell you if anyone is using that name or logo as an unregistered trade mark. The dangers of not doing so can be highlighted by the example of Overwatch League (whose logo looked like it was going to be challenged by Major League Baseball9) and ELEAGUE (whose logo is being challenged by Adidas10).
It is important to note, however, that just because a name or logo is not a registered trade mark does not mean that no-one else is using it. If someone else has used a particular name or logo in the course of trade and has developed goodwill as a result of that (i.e. consumers who see that name/logo have learnt to associate it with that particular business) then they may be able to prevent you from using it, or a similar name, under the law of ‘passing off’ or unfair competition.
With non-endemic brands now becoming more involved with eSports through sponsorship, it may be prudent to stay away from any names or logos that are similar to established businesses. Similarly your name shouldn’t suggest that you are part of, or affiliated to, any other organisations if you are not. For example, if you want to start an eSports team called "Riot ESports" or "Lol ESports" then you are likely to run into trouble. Similarly, think about any naming requirements relevant to specific games. For example, eSports teams signing up to the Overwatch League were required to use names that reflected their location, for example London Spitfire and Shanghai Dragons11.
If you are comfortable that you meet any relevant requirements and that you won’t be stepping on anyone’s toes by using your proposed name or logo, the next step for you is to register your trade marks (which may include your name, logo and any slogan you have come up with), purchase any domain names you want to use, register social media accounts, and consider whether there is any other intellectual property that may be relevant to what you are doing (such as patents and design rights). Keep in mind that most IP rights, including trade marks, are territorial in nature, meaning they only apply in one country. There are a couple of exceptions, for example EU Trade Marks cover all 28 (currently) member states of the EU and can be filed with a single application. There is also a mechanism known as the Madrid Protocol, which makes it easier to apply for the same trade mark in multiple countries at once. Also keep in mind that registering your rights in many different countries is likely to attract several different registration and renewal fees, so you may need to prioritise and build up your portfolio gradually.
As well as the above, you may also have copyright in original works which you have created, for example artwork, logos (which can be protected both as trade marks, and by copyright), original text which appears on your website (such as player bios) and software code. Copyright protection does not need to be registered in Europe and most other countries, but there is a registration mechanism in the US, so this is something to bear in mind when considering where you want your start-up to operate. If a copyright work (such as logo, elements of your website, artwork) has been created by a third party, remember that just because you paid for their services does not necessarily mean that you own the copyright in that work. Ensure that, as part of the deal, you obtain a written assignment (i.e. transfer) of copyright signed by the person who created the work.
Employees and Consultants
Many start-ups begin life as a one-man (or woman) band. If this sounds familiar then you have probably taken the decision that it makes sense for you to do all the work yourself initially. However, at some point in the future when your start-up grows you may have to bring in some extra hands to help with the workload. Depending on your start-up, you may want to consider either employing individuals or engaging freelancers / self-employed consultants.
Whenever you engage the services of an individual, you should have a written contract in place. Where you employ someone, you must have a written contract of employment, which sets out the details of employment (such as salary, notice period and holiday entitlement) and also clarifies the respective obligations for you and your employees. Any employees you do have will be entitled to certain statutory rights, for example minimum wage, holiday and protection from unfair dismissal after two years’ employment. You will also have additional responsibilities including PAYE deductions and pension contributions, so employing someone is therefore not a decision to be taken lightly.
For some start-ups it might not be necessary to have employees. In these cases you may want to consider engaging individuals who are freelancers or contractors (e.g. if you are starting a team and you only want to engage your players for a certain tournament). This means that they are self-employed, and because they are in business on their own account, they have greater autonomy from you and the relationship between you and the individual is looser than it would be if they were an employee.
As with an employment contract, you should think about what responsibilities you want your contractors to have and include them in your contracts. Do you want your players to practice for a set number of hours per day? Do you want them to be streaming on a bi-weekly basis? If they are posting on social media, do you want them to adhere to any guidelines? These are all things you will need to think about and may want to provide for contractually. Note, however, cases against Uber12 and other “gig economy” platforms have reinforced the message that you cannot simply decide whether an individual is an employee or not – their legal status (meaning their rights and your legal obligations to them) will be determined by the factual reality of your relationship. As a result, the closer the working relationship between you and the individual, the more control you wish to exercise over an individual, the more likely it is that you are their employer and they have“employee” or “worker” status, leading to additional obligations on you.
When putting in place contracts for your employees or freelancers, you may want to consider certain protections for your start-up, for example restrictions on employees going to work for a competitor straight after they leave your business. You should also clearly set out that all intellectual property that the employee or freelancer creates will belong to the company and not the employee or freelancer.
It is also important to note that for teams specifically, certain leagues impose minimum terms for players, for example League of Legends specifies certain salary and revenue share requirements13, so it is worth thinking about which titles you want to compete in and complying with their minimum terms. We will discuss regulation more specifically in part three of this article.
Hopefully this article has given you a few things to think about that you may not have considered before. Part two, which will be published in the following weeks, will go on to explore relevant issues in advertising, sponsorship and data protection that relate to eSports start-ups.
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- Tags: Broadcasting | Business Law | Commercial | Contract Law | Employment | Esports | Football | Governance and regulation | Intellectual Property Office | IP | Major League Soccer (MLS) | Start-ups | United Kingdom (UK)
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Mike Jones: Associate, Harbottle & Lewis LLP
Mike advises on a broad range of commercial and regulatory matters in the sports and interactive entertainment industries, with a particular focus on sponsorship matters, esports, game publishing deals and the use and exploitation of new technologies including virtual and augmented reality and artificial intelligence.
Mike works with and advises sports governing bodies, live event organisers, professional sports and eSports teams, individual athletes and professional gamers, video game publishers and studios and various other rights holders and brands on a variety of matters. As a trainee at Harbottle & Lewis LLP, Mike was on a long-term, part-time secondment at the Pokemon Company International.