Dabe Alan

Lawyer up: Gambitious ditches Kickstarter’s “backing” system for actual investment

Lawyer up: Gambitious ditches Kickstarter’s “backing” system for actual investment

Kickstarter allows anyone to “back” a project, and maybe earn a T-shirt or a poster, but Gambitious is hoping to share the act of investment with a wide audience. Instead of donating money in return for a copy of the game and possibly bonus items, Gambitious will allow you to fund games by buying chunks of equity in the game’s developer or intellectual property. You could see a large return on your investment if you help to fund the next Minecraft, and to some that’s much more attractive than access to a beta.

“A statement I do like to make is that we are not jumping on the crowdfunding bandwagon, we have been working on Gambitious months prior to the Double Fine campaign,” Gambitious’ Paul M. Hanraets told the Penny Arcade Report. “We really want Gambitious to work, the industry needs it, because there are too many projects that should see the light of day.”

Unsurprisingly, investing is much more complicated than backing. Kickstarter is structured so backers make a simple purchase; people are able to pay a set amount in exchange for tangible items or access to the final product. Gambitious removes that barrier and invites people to become a part of the companies they invest in, and that difference opens the possibility of a legal quagmire.

You own it, you’re responsible for it

The system will launch in Europe, with support for North America promised in the future. Developers need to be incorporated to take part in the Gambitious platform, so two-man teams in the basement will need to become a legal entity if they’re hoping to raise money. Heck, they don’t even need a game; Gambitious will allow developers to sell stakes of themselves to investors if they so choose. Who doesn’t want a little equity in a video game developer?

Of course, that comes at a cost. “An investment can be made starting at as little as €20 (approximately $26.40) per investment unit, to as much as €2,500,000 (approximately $3,300,086.39). As it is likely that we will have a wider variety of investors than Kickstarter it is hard to name an average investment,” Hanraets said.

Gambitious will soon include an advisory board of industry veterans with the ability to refuse any project or company, and the company “demands” companies take a proactive attitude to promoting their project; there will be no sitting down to wait for the funds to roll in. Still, this is your investment, and ultimately you own the risks when and if you decide to help fund a studio.

“The studio will be regulated and monitored by investor legislature and the crowd, through online tools,” Hanraets explained. “But it is still an investment where investors are responsible for selecting the right ideas, if a company they have invested in underperforms they lose your money. In any case of bankruptcy normal Dutch corporate law rules can be applied during the bankruptcy process.”

Things become tricky if a project fails or a company folds, and both events are a very real threat in the video game industry. So what happens if the game or company you invested in dies? “There is no basic answer to [that] question, it all depends on the situation given. How far is the project in development? Was there mismanagement?” Hanraets asked rhetorically. “Gambitious won’t handle the legal aftermath, we are a platform which connects investors with studios in the need of funding. But we will incorporate an advisory board of industry veterans who will review the projects and can offer additional services.”

The real winners may be the lawyers

We spoke with investor Kevin Dent for our story on Kickstarter, and he responded to the idea of Gambitious with something close to horror. “If I get into this, I do not actually know how I can keep hundreds of investors happy without a team of lawyers. The very notion that I can be on the right side of compliance without spending tens of thousands on lawyers is nonsense,” Kevin Dent said. “I sit on the advisory boards of a few companies and I find it hard to keep under ten investors happy.”

“This very week on Kickstarter, one of the projects bought two iPads for a new iPad title. The forums went batshit vilifying them and none of those people hold equity in those firms. Imagine if you piss off the majority of your investors and they decide to… well I don’t know, fire you? Guess what? That is the prerogative of investors; they can and do actually do that,” he said. “You cannot give investors back their money and carry on as if nothing had happened. You have a fiducially-bound duty to those people.” Founders can protect their place in their company by setting up preferred stock, but that takes lawyers and business savvy—which many small developers can’t afford to hire or develop, respectively.

There are two different outcomes for a Gambitious campaign: Either a small number of investors pay large amounts of money, in which case they may own a large percentage of the studio or intellectual property; or a large number of investors invest small amounts of money each, in which case you have a large number of people who own a small percentage of the studio or intellectual property. Both possibilities introduce a large number of complications to the relationship. I spoke with a lawyer about Gambitious and, after I promised to protect his anonymity, the only thing he would say based on the information I sent him was that this is a great deal for lawyers; both sides will likely need legal representation to fully protect either their company or their investment.

Investor Beware

As of this writing, there are no answers to fundamental questions such as whether or not the investment delivers voting shares or non-voting shares, or how any future profit is defined/accounted/distributed. And there’s no information on tax implications, audit process, reporting requirements, transfer of shares, arbitration and legal jurisdiction, financial and legal liability, and a whole host of other issues minor and major. While it’s good to have more options for funding game development, Gambitious raises a giant red flag because there is no simple way to bring investors into a company. Taking on investors—real, actual investors—during the early days of a project forces everyone to deal with complex legal challenges. There is very real risk of both sides misunderstanding what they’re getting into, or facing extensive legal fees to protect themselves.

Gambitious offers a simple pitch: You get to invest in companies you believe in and games you’d like to play, and if any of those entities becomes profitable you share in the spoils. It’s an attractive idea, at least on the surface, but we’re extremely weary of the unintended consequences of start-ups inviting large numbers of people to invest in their ideas. It’s possible these fears will be allayed once we’re given specifics on how the company will operate in North America, but it’s clear the risks are just as easy to see as the possibilities.

We’ll be keeping an eye on Gambitious after launch to see how things go. And, as always: if you’re considering an investment in video game development, never invest money you’re not willing to lose.