Upfronts, Guarantees, Recoups

When you go with a publisher on an independent game, one of the most critical parts of the equation has to be the Revenue Share (or sometimes colloquially called the "split"). Sadly, it's often poorly understood and not something many new developers feel qualified to seriously negotiate about with their publishers. The survival of many promising indie studios would've been much less fraught if folks understood the nuances and implications of these very common systems.

So before we continue, let's split up potential sources of revenue from a published game into four main categories: Upfront, Guarantee, Pre-recoup, and Post-recoup. The first two of those are pre-release revenue (and thus fairly safe, financially), and both recoup types are post-release revenues (and thus fairly risky, financially).

Upfront

Any amount of money paid to you before completion of the title. This type of money is usually paid in milestones (the start of "Prototypes and Vertical Slice" has a short overview of the basic milestones), and those milestone payments are dependent on pre-agreed conditions about what to deliver.

The Upfront is your safest source of revenue - it will be paid regardless of your game's success in the market. The Upfront is sometimes also erroneously conflated with your "development budget", but we'll get to why that is a dangerous way of looking at your finances in a future post.

In my earlier article, Budget Viability, I discuss a way to establish what your Upfront would be - in the spreadsheet attached to that post, you can find what your Upfront should be under "Asking Budget". Keep in mind that if the game fails commercially, the remainder of your Upfront is the only money you'll have - having safe margins on this amount makes a huge difference.

Guarantee

Any amount of revenue guaranteed to you when the game ships. These Guarantees are more common in platform deals (things like, but not necessarily Microsoft's Game Pass), where they'll usually be a significant portion of the money you receive. It's important to recognize that a Guarantee will not help you fund your development - it's basically an amount of revenue that is guaranteed to you and paid out in full at the completion of a certain deliverable. That said, the Guarantee is also a fairly safe source of income - as long as you can hit the deliverable, you will (generally!) receive the funding that you signed for.

Pre-recoup

This is usually a "split" - a percentage of revenue goes to the developer as profit, and a percentage of revenue goes towards the publisher to earn back their investment - thus the term recoup (which, surprisingly, does not share etymological context with "recuperate"!). The pre-recoup is defined by the publisher not yet having earned back their investment - and as such, the split tends to heavily favour the publisher.

Two common mistakes to watch for:

• "Earning back their investment" can be defined in many ways. In the version that's common at time of writing, publishers recoup when their revenue (not total revenue, not game revenue - their revenue!) on the title equals the Upfront plus the service costs, which include expenses such as marketing, localisation, and QA. On smaller projects, certain developer-friendly publishers will take those costs as their own risk & not recoup them at all, but in general most publishers will keep the prospect of recouping that risk to the more aggressive pre-recoup phase.
• "Revenue" is also a deeply undefined term. The standard assumption would be the revenue over which the split is calculated is any amount of money the publisher receives them from the respective platforms for the exploitation of the title. This would then include Guarantee deals such as exclusivity deals and subscription fees, which would then count towards the recoup. Sadly, not all publishers play entirely fair with this, and as such it's important to check your contract for a clear definition of what constitutes revenue.

With that in mind, the revenue split on pre-recoup can vary wildly, from 0/100 to 50/50. In the table below I've listed several of the most common revenue splits I help negotiate for developers that work with me through my consultancies.

0/100 Increasingly common, publishers do not pay out any revenue to developers until they've fully recouped their investment. This is extremely unfavorable to the developer, who can now not guarantee income after launch - but can be agreeable if offset with a large enough margin on the upfront, ensuring financial continuity after launch.

20/80 A more common standard in 2022, 20/80 allows publishers to take on slightly more risky projects while still aggressively recouping their investment. In case the game launches strongly, 20/80 allows the developer to keep on a core team of several developers - but often isn't enough to fund a whole team.

30/70  The old standard, 30/70 is still negotiable with most publishers given the team is experienced and/or the title is sufficiently strong. Most online advice from the last decade is written under the assumption of 30/70, but increased visibility issues and a race to the bottom have allowed increasingly powerful publishers to move away from this model for most developers that do not have a relatively sure-fire title, or developers who have worked with a publisher using this split before.

50/50 Relatively uncommon, the 50/50 split is mostly used for equal partnerships. Note that an equal partnership requires two conditions: the financial investment on the developer's side equals or exceeds the publisher's risk, and it how to be abundantly clear that the publisher is not actually needed but merely convenient.

It is my opinion that the pre-recoup split is the least important (not unimportant, mind you!) to negotiate.

Consider the following: if you have a project that costs US$200,000 (including service costs) and the Publisher is recouping at 70%, that means the developer will be at approximately US$85,000 developer revenue if the game performs well enough to hit US$200,000 revenue for the publisher, which is at US$460,000 revenue total (assuming a 30% platform fee, which is the most common platform fee). For irony, note that at this point, the platform is making more revenue from the title than the developer (at this point, they'd have made US$122,000).

In general, games tend to fall in one of three categories: those that do well, those that can sustain the studio but not much more than that, and those that don't do well. Games either succeed, sustain, or don't sell at all. It's rare that a game falls in an in-between category.

Given the above, you can see how my reasoning comes together: if the game does poorly, a good Upfront or Guarantee would serve the developer far better, allowing the developer a margin while they pitch their next game - which, hopefully, the developer has already started on pitching as they wrap up the previous title.

The pre-recoup share would likely be of little help in this scenario: not only do funds not start coming in until several months after launch (expect 3-5 months) - but the game wouldn't be making enough to recoup in a two-year projection, which means the amount of money coming in would likely be in the low thousands and declining if even that. If you've done your budgeting right, you've got some margins on your Upfront/Guarantee that'd achieve the same, and the pre-recoup revenue share would not make a meaningful difference in the runway of your studio.

If the game does well, after a few months the pre-recoup amount would max out at a bit over the developer's share relative to the budget (a 30% rev share effectively means you will have approximately 42% of the budget paid to you as revenue share before the publisher recoups). After that, you'd switch to the post-recoup conditions, which would be more favourable to you.

Post-recoup

Similar to pre-recoup, the post-recoup is a percentage share of the revenue defined by the fact that the publisher has earned back their investment, and they have moved into a profit, too. In general, the post-recoup share is more favourable to the developer than the pre-recoup: that does not mean it has to be more favourable to the developer than to the publisher! Some publishers further separate Post-recoup into a "Up to 2X" and "After 2X" or variants of that, where the split adjusts as more money comes in.

The Post-Recoup conditions usually continue until the end of the term of your contract with a Publisher, and are generally maintained without change indefinitely or for a period of five to seven years. In case the contract has a term defining an end date (also known as a "term"), you want to watch carefully for clauses that define what happens after that period of time with the rights and earning of the game.

~40/60 A rarity, but often tried on inexperienced developers by less developer-friendly publishers, publishers will try and sustain a revenue share that is more favourable to the publisher than the developer. The publishers' justification will often refer to the risk that the publisher is taking on by bringing such inexperienced developers on board, as they're aware even when pitching properly, most young developers will not have many options to negotiate with. This is, of course, nonsense - if the game has recouped, the risk has already disappeared. The publisher arguing for an aggressive pre-recoup is entirely fair if they're taking disproportionate risk with investment or an inexperienced team, but the post-recoup is just a way to maximize profits (which, obviously, is a publishers' goal). If this happens to you & you feel fairly confident, try politely arguing back that you would be happy to offer to take a lower pre-recoup to offset their risks in exchange for a better post-recoup.

~50/50 The most common post-recoup revenue share at the time of writing seems to be the 50/50 split, give or take 10%, where both partners get a relatively equal amount of revenue after the publisher has earned back their investment. If the investments are also relatively equal (the developer put in more sweat-equity/opportunity cost, the publisher put in more money), this is a sensible post-recoup distribution.

~60/40 A post-recoup revenue share where the developer gets more than the publisher, the old standard for recoup used to be an inversion (pre: 30/70, post: 70/30). The inversion of splits has become rarer over time, but given existing conditions on previous titles, a confident pitch, and/or an experienced team, is still possible to negotiate. If the developer has an extraordinary investment in the title's development relative to the publisher, this should be the given outcome - but note that publishers will only want to go for this if it clear that the developers' risk exceeds their own, and that the game does not need them to succeed.

Leverage & Opportunity

With all the above in mind, there currently are four common scenarios, and they mostly have to do with the Publishers' leverage and opportunity. There are very few exceptions to this: even publishers that say they have pre-defined agreements will often negotiate if a really special game comes along. In the below overview, I've listed some common scenarios and how they affect leverage, and what values and outcomes you could expect.

Needs funding, visibility, & services: This is the most common scenario. For inexperienced developers or games with less clear opportunity in the market, this deal will almost always come down to the asking budget upfront, 0/100 pre, <50/50 post.  For more experienced developers or games with clear opportunity, expect something along the lines of the asking budget upfront, 20/80 pre, 50/50 post. A good deal in this scenario would look like the asking budget upfront, with a 30/70 pre, 70/30 post.

Needs only visibility & services, not funding: While you would think this is a good scenario, it actually is not: in terms of leverage, it means the publisher knows your title has significant investment from your side, but your ability to return on that investment is dependent on their services.  For inexperienced developers, this is a relatively unfortunate situation - unless they've reached out to you, very few publishers will take a deal like this unless it is a clear win (in which case, you might not need a publisher in the first place - you've either gone viral already or marketing agencies like Popagenda, Evolve PR, or StridePR can help with the visibility for a fee). For developer with shipping experience, expect a 30/70 pre, 50/50 post deal.

Needs funding, nothing else: While uncommon in traditional publishing, this scenario is relatively common in more investment-like deals, or grant-like structured publishers that do not offer services. In these cases, inexperienced developers will usually not stand a chance - experience is a general pre-requisite for successful self-publishing, and the fact that rare exceptions exist does not offset the tremendous risk any publisher would take investing in an inexperienced team self-publishing. Given that that leaves this scenario for more experienced developers, the percentages here are usually discussed between experienced negotiators, and will vary wildly on the amount of investment needed and the projected earnings of the title

Needs nothing, but likes convenience: A rare scenario, this is often a partnership-of-convenience between two entities with a pre-existing relationship, under similar conditions or conditions that reflect earlier outcomes. Think of scenarios where a game was extremely successful, and the developer enjoyed the collaboration with the Publisher. In such a case, it's likely that both Publisher and Developer would be interested in continuing the collaboration for future projects, reflecting the changed context in the deal (in this case, a more favourable deal for the developer).

If you're in a position to negotiate, my recommendation would be to focus on a priority list that goes Upfront > Post-Recoup > Pre-Recoup, where a higher Upfront is most preferable, and a higher Pre-Recoup least preferable. Obviously, you'd want each of them to be as high as possible, but if you're going to push anywhere, push on the Upfront (as it is guaranteed money) - and if you need to yield a little, yield on the Pre-Recoup (as it's the only unguaranteed revenue with a ceiling). If you're feeling very confident about the game's chances in the market, obviously focus on the Post-Recoup - conversely, not caring about the Post-Recoup or yielding on it might imply a lack of confidence that publishers might take note of.

Actionables

• Since I've found the concept of "why I find Pre-Recoup least important" somewhat counterintuitive to explain to some, for my consultancies I've created a Pre-Recoup Plaything to show how these values relate to one another in the pre-recoup phase. Take note that the amount the developer has earned at Recoup does not change - your Pre-Recoup has a hard ceiling. Keep that in mind for negotiations: a higher Pre-Recoup percentage does not translate to higher earnings, only to faster earnings, and only if the game does well.
• If you have a currently signed contract, or you're evaluating a contract for the future, check for the most important definitions related to this topic: the percentage each party receives under what conditions, what costs count towards the recoup, what revenues count towards recoup that investment, and if, and if so, how a termination of the contract is resolved. If you don't understand these terms, or can't find them, ask for clarification or inclusion thereof.
• When creating future projections for the financial survival of your studio based around an upcoming project, make three models: one where 0 copies of the game are sold, one where the game breaks even exactly for the publisher, and one where the game triples the publishers' investment. How likely is the survival of your studio in those scenarios? If your studio won't survive some of these scenarios, how can you adjust the projections to be more safe? Would a relatively minor increase in Upfront help the studio keep a bit more runway?