Publishing Agreements Explained: Royalties, net revenue & recoup

The financial clauses of a video game publishing agreement are among the most important sections of the contract. They determine how—and when—the developer actually earns income from the game’s sales.

While this article does not cover merchandise royalties specifically, the same principles generally apply.

What are Royalties, Net Revenue & Recoupment?

Royalties are payments a developer receives from revenue generated by the video game, typically after certain agreed deductions and (in most cases) after the publisher has recovered its initial investment. They are typically calculated as a percentage of Net Revenue.

Net Revenue is the revenue generated from sales and other exploitation of the game after agreed deductions have been applied. Common deductions include refunds, platform fees, taxes, and sometimes marketing expenses. This figure forms the foundation for calculating the royalties owed to the developer.

Recoupment is the process by which the publisher first recovers its development and marketing investment from the game’s revenue before the developer begins receiving their share of royalties.

Why royalties, Net Revenue and recoupment matter

For publishers, recoupment is a form of risk management: it ensures they can recover the money invested in development, marketing, and distribution before sharing profits with the developer.

For developers, royalties are often the only long-term source of income the game produces.

Understanding how Net Revenue is defined and how recoupment works can determine whether a project sustains the studio or drains it. Seemingly small details in these clauses, such as what counts as “Net Revenue” or when recoupment is considered complete, can have major financial consequences.

Example of the royalty clause in a video game publishing agreement

Below is an example of a royalty clause in a video game publishing agreement which we have seen in practice, so that you can recognize a similar clause in your own draft:

Even a straightforward clause like this hides a lot of complexity. Every defined term must be interpreted precisely to avoid misunderstandings and future disputes.

How to review and negotiate royalty clauses

Clauses can vary greatly between different contracts. Therefore, it is always important to thoroughly review each clause and check how they relate to or align with the other clauses in your video game publishing agreement. However, there are a few general aspects to look out for.

Define revenue as broadly as possible

The definition of “revenue” should be as broad as possible to avoid discussions about whether certain income sources count toward royalties. Ambiguous definitions often lead to publishers excluding certain earnings, such as revenue from DLCs, bundles, or streaming rights.

Developers should also consider other possible income sources, like succesful crowdfunding campaigns, government grants, or advance payments from platform holders. The contract should clearly state whether these amounts are included in or separate from the revenue calculations.

Limit deductions to standard, reasonable items

Deductions are the amounts subtracted from gross revenue before royalties are calculated. Typical and reasonable deductions include:

• Refunds
• Chargebacks
• Platform fees (for example, Steam’s 30% cut)

However, developers should pay close attention when publishers add other deductions, such as marketing, localization, or QA costs. These items can drastically reduce the royalty base, especially if not capped or transparently reported. Ask for a detailed definition of each deduction and consider requiring itemized reporting for verification.

Make recoupment come from total revenue, not only the developer’s share

One of the most important aspects of recoupment is what pool of money it comes from. In most agreements, the publisher’s investment is deemed recouped when the total amount of Net Revenue retained equals the publisher’s investment.

For example:

• Publisher invests €500,000;
• Until €500,000 of Net Revenue is retained, all income goes to the publisher;
• After recoupment, royalties are shared according to the agreed split.

In some contracts, the publisher’s investment is deemed recouped when the developer’s share of Net Revenue equals the publisher’s investment. This means the publisher wants to recoup its investment through the developer’s portion of revenues rather than from total revenue. The effect is that once the investment has been recouped, the publisher has already earned a profit.

For example:

• Publisher invests €500,000.
• Royalties are structured so that the publisher recoups its investment from the developer’s share of Net Revenue, rather than from total revenue;
• The developer receives 50% of Net Revenue;
• The publisher has recouped when the developer’s share of Net Revenue equals € 500,000, which occurs when Net Revenue is € 1,000,000.
• By the time the publisher has recouped, they made a profit of € 500,000.

Developers should therefore negotiate from total Net Revenue rather than from the developer’s share, as this is more balanced and avoids the hidden profit effect during the recoup period.

Clarify whether future investments trigger new recoupment cycles

A common oversight is failing to clarify what happens when the publisher invests additional money after initial recoupment.

Imagine a scenario where the publisher has initially invests € 500.000 in the development and marketing of your game. Within the first quarter after release, this amount is recouped and you begin receiving royalties according to the agreed split. However, to increase the game’s commercial success, the publisher decides to spend another € 50,000 on marketing.

If the contract states that until the recoupment of the development and marketing advances, all revenue generated with commercially exploiting the video game will be retained by the publisher, this new marketing spend could trigger a new recoupment cycle. In that case, the developer would not receive royalties again until the additional investment of € 50,000 has been recouped as well.

To avoid this situation, it is advisable to include a clause that additional post-launch investments only trigger a new recoupment cycle if both parties agree to it in writing.

Assess whether the developer can survive financially until royalties arrive

Royalties are often delayed due to recoupment. Developer should carefully consider whether they can financially survive until the moment they receive their first royalty payment.

This assessment is not only in the developer’s interest but also in the publisher’s, as the publisher relies on the developer to continue performing certain post-release obligations, such as bug fixing and providing technical support.

Before you sign: summary and next steps

Royalties, Net Revenue, and recoupment form the backbone of a publishing agreement’s financial model. For developers, the key points are:

• Ensure that revenue is defined as broadly as possible;
• Limit deductions to standard, reasonable, and transparent items;
• Confirm the recoupment comes from total Net Revenue, not only your share;
• Prevent new publisher investments from starting endless recoupment cycles;
• Assess whether your studio can stay financially healthy until royalties begin.

Because these clauses directly determine the financial outcome of your game, it is highly advisable to have a lawyer with experience in video game publishing review your contract. Even small differences in definitions or recoupment structure can signficantly affect how much you earn, or how long it takes before you see any royalties at all.

Next, we’ll examine the Audit Clause, which determines how you can verify whether your publisher’s financial reporting is accurate and complete.