Say I am developing a game and released a demo on kickstarter and they, the demo is a free download. but if they decide to fund the game development would I still need to pay the royalties out of the kickstarter?
Royalties on Kickstarter or other crowdfunding entirely depends on what the funder gets in exchange for the commitment of funds. If the demo is free as you say, and available to the general public, then the revenue isn’t for the game. Same if it’s for a tshirt or soundtrack. But if the funds gets the funder game access, or other kind of in-game benefit, then the funds are subject to a royalty.