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Royalties when crowdfunding

Two questions about Crowd funding royalties with respect to EULA v12:

  1. Let's say we have 4 backer tiers with prices and rewards as follows:
    • A=$15 (poster),

    • B=$20(poster+game Product),

    • C=$40(poster+game Product+shirt),

    • D=$70(poster+game Product+shirt+ in-game bonus).

    (Assume the posters and shirts don't affect the game) My understanding from EULA paras 5.C and 5.6 is that royalties apply only to the marginal gross revenue from Product access or in-Product benefits, and so in this example Quarter-Royalties are calculated as 5% of :

    $0 * A + ($20 - $15) * B + ($20 - $15) * C + (($70 - $40) + ($20 - $15)) * D

    after the $3000 per-Product exemption. Is this correct?

  2. When are crowd funding royalties reported & owed? At the time a game is crowdfunded, it's quite possible the final production engine is in-flux and could change; we could try out UE4 and eventually release a non-UE4 game, or alternatively release no game at all and refund the backers. It would seem no Product exists (or, alternatively, the Product had not yet been distributed to non-Engine Licensees) until we do in fact release a UE4-based game to the backers or other end-users (non-Engine Licensees), and therefore that release date is the date that counts for royalties/reporting.

Product Version: UE 4.17
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asked Oct 12 '17 at 09:29 AM in Legal & Licensing

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zeehlxdv1
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On your first question, I'd read the royalty-bearing revenue on the tiers as follows:

  • A - $0

  • B - $5

  • C - $5

  • D - $35

And you're correct about "after the first $3000" in gross revenue.

On your second question, this is interesting. I would say that the royalties are due when received (on a quarterly basis) for a Product (as defined by the EULA). So if revenue is received for a product that may end up being UE4 or it may end up being another engine, that revenue wouldn't be recognized for royalty calculation purposes until it is determined that the money was received for a UE4 Product. But this approach runs the risk of misleading crowdfunding backers and/or leading to a much larger royalty bill when that revenue is recognized for royalty purposes (and note that the $3000 is on a quarterly basis - so it's better to spread out payments).

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answered Oct 12 '17 at 02:48 PM

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atypic STAFF
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avatar image zeehlxdv1 Oct 12 '17 at 07:55 PM

1 sg.

On #2, so if we make a decision that the game will be a EULA Product and then recognize it for royalty purposes and pay Epic that quarter, and later decide not to release the game using UE4 after all, is there any provision for us to get that back? EULA states no refunds are allowed.

Alternatively, if we're willing to take the hit of not getting the benefit of the multi-quarter $3000 exemption by spreading it out, can we pay the royalty for backer funds on release (and thereafter, according to actual purchase dates)?

avatar image atypic STAFF Oct 12 '17 at 08:20 PM

You are correct that no refunds are allowed.

And it's not permitted to withhold royalty payments until release - presumably you know whether or not it's a Product prior to that point.

avatar image zeehlxdv1 Oct 12 '17 at 08:38 PM

At https://answers.unrealengine.com/questions/582397/regarding-revenue-release-reporting-and-royalties.html bdavis indicates refunds and returns (and VATs and similar) are excluded from gross revenue for royalty calculations (we're discussing non-kickstarter-type sales there). Combining that, however, with your answer above, is the position that if we decide a game will use UE4 and be a Product in some quarter, and then later the crowdfunding project fails and we refund all our backers in some later quarter, we'd 1) have to pay royalties starting in the quarter we decide the game is a Product, 2) we wouldn't pay royalties the quarter when we have to refund funds, but 3) we cannot recoup any of the previously paid royalties.

avatar image atypic STAFF Oct 12 '17 at 09:57 PM

We certainly think that's an edge case which rarely occurs, if ever. At any rate, your reading is correct.

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