LP Login

Think Big. Move Fast.

Some interesting tidbits about both free to play and subscription MMOGs coming out of the talks at Austin GDC. Min Kim of Nexon says:

Not just a Korean thing:

“South Korea is still a big market for us,” Kim admits, “but the split is now 50/50 with overseas markets,” which includes the Asian and U.S. markets.

On growth in North America:

In 2005, Nexon America’s revenues were around $650,000. In 2006, when they added Paypal as a payment option, sales rose to $8.457 million, based on item sales. In 2007, once Nexon released its Nexon Cash cards to retail stores, revenue jumped to $29.334 million.

On localization of games:

While many of the free to play games currently come from Korea, Kim feels that the market will eventually be dominated by Western titles. “We’ve seen this happen in other places like China,” he posed. “The big games now are from Chinese developers. I think the same thing will happen in the West, with Western-developed titles.”

On how game design interacts with business model design:

Focus on fun, not just on what items you can sell. “Have an idea about what your business model is,” he advises, but don’t go overboard laying out your business plan completely from the beginning. “Don’t have all your items and categories pegged out. Make sure you have a fun game, first.” 9 times out of 10 the ideas you’ll have at the beginning will be wrong. The players will tell you what they want to buy.”

From a panel on evolving business models in MMOs, CCP’s (Eve Online) Petursson notes that subscription MMOs mostly reward time spent playing (which is consistent with the business model):

All subscription-based MMOs are merit economies – those with most time, win. But the only thing you can’t buy is social merit. To be a purely subscription-based game, you should aim for social merit as it’s the only merit economy defensible against outside influences.

On when Free to play works and when it does not (a function of demographics, geography/ cultural norms and genre):

* Robert: The demographics in LOTRO etc are a lot older: 20-35, male. F2P games tend to be younger, more females, casual, less hardcore. 30 year old males are not playing a lot of F2P and have no problem paying monthly subscription. Younger people and kids are playing lots of games and want F2P for that flexibility. However, F2P microtransaction games can pull in more ARPU than subscriptions.
* Helmar – In CHina, it is illegal to have an automatic debit for sub based game – user always has to choose. For game operator it’s important to realize that most biz models will be implemented by user… better to implement them yourself and tune appropriately.
* Min – also based on genre…not many ppl shell out $15/month to play FPS. There are some F2P FPSs now in Asia. Biz model based on genre as well.

Turbine’s Ferrari notes that F2P games need low barriers to play

What we’re seeing is a shift that a lot of the f2p games are so much lighter than traditional MMOs. Heavy MMOs are beautiful, but that puts a barrier to entry based on min spec – younger demographics don’t have these systems. Global expansion doesn’t support those specs either. Our games are above 5gb in size, whereas Maple Story is close to 1gb now.

Nexon’s Min Kim has a contrarian view:

In S Korea, people have no problem downloading big client products as the web is so fast. I often wonder if browser-based gaming is an interim step until web speeds creep up and people can return to client download.

And multiple comments on the importance of letting your customers pay you how they can and want to pay you (including prepaid cards at retail):

* Min: Offering payment methods relevant to your target demographic is important. Over 20 years old, credit cards are viable. In the teen demographic, prepaid cards are still the dominant form of payment. Maybe SMS payments will come, but it is all about accessibility and convenience. In demographics such as Club Penguin’s, credit cards are a big part of their payment methods as parents are paying.
* Nicolay: I think Habbo has 140 different payment methods. The ability to pay has to be the lowest barrier to entry, otherwise you aren’t getting any money.
* Robert: SMS charges surrender so much margin to carrier, but retail cards may be more expensive just to get into channel.
* Hilmar: It’s puzzling why carriers aren’t lowering their surcharges. People would switch to it immediately, resolving credit card issues.
* Min: There is no access for our consumers to use credit cards. In 2006, we did $8.5M in the US in virtual item sales – in 2007 we did $29.3M in virtual items. Virtually all of that growth came from enabling people to pay.
* Robert: Companies like Turbine are looking at the console to expand their playerbase. Potentially we can use an xbox payment system, so we don’t need to do it ourselves. It’s about expanding access for players.

Continue Reading ...


Many websites default to the 728×90 (leaderboard) ad size when designing their site. This is a reasonably good option as it has the second highest click through rate of the various standard ad units. But it is possible to do better. Marketing Sherpa researched clickthrough rates by ad size (from largest ad unit to smallest) recently:

The chart shows that click through rate is not simply a function of the size of the ad. The largest ad unit, the wide skyscraper (160×600) has the second lowest click through rate. For the full range of IAB standard ad units, click here.

Continue Reading ...


This is a guest post by John Bautista. John is a partner in Orrick‘s Emerging Companies Group in Silicon Valley. John specializes in representing early stage companies.

_____________________________________________________________________________________

When entrepreneurs start a company, there are four things they need to know about their stock in the company:

• Vesting schedule
• Acceleration of Vesting
• Tax traps
• Potential for future liquidity

VESTING SCHEDULE

The typical vesting schedule for startup employees occurs monthly over 4 years, with the first 25% of such shares not vesting until the employee has remained with the company for at least 12 months (i.e. a one year “cliff”). Vesting stops when an employee leaves the company.

Even Founders’ stock vests. This is to overcome the “free rider” problem. Imagine if you start a company with a co-founder, but your co-founder leaves after six months, and you slog it out over the next four years before the company is sold. Most people would agree that your absentee co-founder should not be equally rewarded since he was not there for much of the hard work. Founder vesting takes care of this issue.

Even if you’re the sole founder, investors will want to see your founder’s stock vest. Your ability and experience is one of the key assets of the company. Therefore, venture capital firms, especially in the early stages of a company’s development and funding process, want to make sure that you are committed to the company long term. If you leave, the VCs also want to know that there is sufficient equity to hire the person or people who will assume your responsibilities.

However, many times vesting of founders’ shares will follow a different schedule to that of typical startup employees. First, most founder vesting is not subject to the one year cliff because founders usually have a history working with each other, and know and trust each other. In addition, most founders will start vesting of their shares from the date they actually started providing services to the company. This is possible even if you started working on the company prior to the issuance of founders’ stock or even prior to the date of incorporation of the company. As a result, at the time of company incorporation, a portion of the shares held by the founders will usually be fully vested.

This vesting is balanced by investors’ desire to keep the founders committed to the company over the long term. In Orrick’s experience, venture capitalists require that at least 75% of founders’ stock remain subject to vesting over the three or four years following the date of a Series A investment.

ACCELERATION OF VESTING

Founders often worry about what happens to the vesting of their stock in two key circumstances:

1. They are fired “without cause” (i.e. they didn’t do anything to deserve it)
2. The company gets bought.

There may be provisions for acceleration of vesting if either of these things occur (single trigger acceleration), or if they both occur (double trigger acceleration).

“Single Trigger” Acceleration is rare. VC’s do not like single trigger acceleration provisions in founders’ stock that are linked to termination of employment. They argue that equity in a startup should be earned, and if a founder’s services are terminated then the founders’ stock should not continue to vest. This is the “free rider” problem again.

In some cases founders can negotiate having a portion of their stock accelerate (usually 6-12 months of vesting) if the founder is involuntarily terminated, or leaves the company for good reason (i.e., the founder is demoted or the company’s headquarters are moved). However, under most agreements, there is no acceleration if the founder voluntarily quits or is terminated for “cause”. A 6-12 month acceleration is also usual in the event of the death or disability of a founder.

VC’s similarly do not like single trigger acceleration on company sale. They argue that it reduces the value of the company to a buyer. Acquirors typically want to retain the founders, and if the founders are already fully vested, it will be harder for them to do that. If founders and VC’s agree upon single trigger acceleration in these cases, it is usually 25-50% of the unvested shares.

“Double Trigger” Acceleration is more common. While single trigger acceleration is often contentious, most VC’s will accept some double trigger acceleration. The reason is that such acceleration does not diminish the value of the enterprise from the acquiring company’s perspective. It is arguably in the acquiring company’s control to retain the founders for a period of at least 12 months post acquisition. Therefore, it is only fair to protect the founders in the event of involuntary termination by the acquiring company. In Orrick’s experience, it is typical to see double trigger acceleration covering 50-100% of the unvested shares.

TAX TRAPS

If things go well for your company, you’ll find that its value increases over time. This would ordinarily be good news. But if you are not careful you may find that you owe taxes on the increase in value as your Founder’s stock vests, and before you have the cash to pay those taxes.
There is a way to avoid this risk by filing an “83(b) election” with the IRS within 30 days of the purchase of your Founder’s shares and paying your tax early on those shares. One of the most common mistakes I’ve encountered with founders is their failure to properly file the 83(b) election. This can have very serious effects for you, including creating future tax obligations and/or delaying a venture financing of the company.

Fortunately, over the years, I’ve developed a number of work-arounds (depending on the circumstances) and we can many times find a solution that puts the founder back in the same position had the 83(b) election been properly filed. Nevertheless, this is one of the first things that your lawyer should check for you.

Of course, you’ll still owe tax at the time of sale of the shares if you make money on the sale. But by then, I’m sure you’ll be able and happy to pay!

POTENTIAL FOR FUTURE LIQUIDITY

Founders’ stock is almost always common stock because VC’s purchase preferred stock with rights and preferences superior to the common stock. However, recently my law firm (Orrick, Herrington & Sutcliffe LLP) has created a new security for founders which we call “Founders’ Preferred” which enables founders to hold some of their shares in the form of preferred stock. This allows them to sell some of their stock prior to an IPO or company sale.

The “Founders’ Preferred” is a special class of stock that founders can convert into any series of preferred stock sold by the company to VC’s in a future round of financing. The founders would only choose to convert these shares when they plan to sell those shares to VC’s or other investors in that round of financing. This special class of stock is convertible into the future series of preferred stock on a share for share basis. Except for this conversion feature, this class of stock is identical to common stock.

The benefit to you is that you are able to sell your shares at the price of the future preferred round. This avoids multiple problems associated with founders attempting to sell common stock to preferred investors at the preferred stock price.

Furthermore, the benefit to the preferred investors is that they can purchase preferred stock from the founder as opposed to common stock.

“Founders’ Preferred” can usually only be implemented at the time of the first issuance of shares to founders. Therefore, it is important to address the advantages and disadvantages of issuing “Founders’ Preferred” at the time of company formation. I normally recommend for founders who want to implement “Founders’ Preferred” that such shares cover between 10-25% of their total holdings, the remainder being in the form of common stock. The issuance of “Founders’ Preferred” remains a new development in company formation structures. Therefore, it’s important to consult legal counsel before putting this special class of stock into effect.

Many VCs do not like to see Founders’ Preferred in a capital structure.

CONCLUSIONS

As discussed above, there are a number of issues to address when issuing founders’ stock. In addition to business terms associated with the appropriate vesting schedule and acceleration of vesting provisions, founders need to be navigate important legal and tax considerations. My advice to founders is to make sure to “get it right” the first time. Although here are many companies on the web that specialize in helping founders by offering forms for setting up companies, it is important that founders get the right business and legal advice, and not just use pre-packaged forms.

This advice should begin at the time of company formation. A little bit of advice can go a long way!

Continue Reading ...


Cooley is one of the largest and most respected law firms in Silicon Valley. It recently released its Private Company Financings Report for Q1 2008, based on the 66 completed deals that the firm worked on in that quarter. …

Continue Reading ...


Recently I posted about how to interview key hires, focusing on the three areas to test a potential hire on:

1. Technical Skills
2. Cultural Fit
3. Performance Skills

Technical skills and cultural fit are relatively easy to interview …

Continue Reading ...


The NY Times is often considered the US newspaper of record, and it lives up to its reputation with an excellent article in today’s Sunday NY Times Magazine about the ambient awareness enabled by Facebook status updates, Twitter and …

Continue Reading ...


Great post today from Sim Simeonov about being wise vs being smart that I’ll quote in its entirety since it is so short:

There is a set of interrelated concepts I’m fond of reminding entrepreneurs about but I’ve never found

Continue Reading ...


It has often been said that good games are easy to learn and hard to master. At this years Penny Arcade Expo, Jamie Cheng (CEO of Klei Entertainment, who are the developers for Sugar Rush, Nexon’s first

Continue Reading ...


In January of this year, we estimated that Facebook was selling digital gifts worth $15m per year. We based this estimate on an analysis of the number of each gift available each week over a 7 week period.

Facebook …

Continue Reading ...


The LA Times notes the popularity of the Club Penguin Times:

The Club Penguin Times … is more widely read than New York’s Daily News, the Chicago Tribune or the Dallas Morning News. And it’s not even 3 years

Continue Reading ...