It does not need any explanation that the financial clauses of a video game publishing agreement are very important. The clauses are key for determining the revenue which the developer will receive from the sale of the game.
While this article does not specifically discuss merchandise royalties, the same general principles often apply.
What are Royalties, Net Revenue & Recoupment?
Royalties are the payments a developer receives from the revenue generated by a video game after agreed deductions and (in most cases) after the publisher has recouped its investment. They are typically calculated as a percentage of Net Revenue.
Net Revenue is the revenue generated from sales and exploitation of a video game after agreed deductions have been applied. These deductions typically include refunds, platform fees, taxes, and sometimes marketing expenses. Net Revenue forms the basis for calculating the royalties owed to the developer.
Recoupment refers to the process by which the publisher first recovers its investment (for example, development funding or marketing spend) from game revenues before the developer begins receiving their share of royalties.
Why royalties, Net Revenue and recoupment matter
For publishers: recoupment ensures they can recover the money they invested in development, marketing, and distribution before sharing profits with the developer.
For developers: royalties are often the only long-term income stream from the game. Understanding how Net Revenue is defined and how recoupment works is crucial for financial survival and for planning future projects.
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:
“Publisher shall pay Developer 50% of Net Revenue from sales of the Game after full recoupment of Publisher’s Development and Marketing Advances. Net Revenue means gross revenue actually received by Publisher from exploitation of the Game, less refunds, platform fees, taxes, and any other mutually agreed deductions.”
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 which is taken into account when calculating royalties should be as broad as possible to prevent disputes.
The reason for this is to prevent discussions whether some revenues generated with the game fall within the scope of what’s shared between the developer and publisher.
Another important aspect to consider, is what happens with the financial amounts that already have been received with the game, including a (successful) crowdfunding campaign or a government grant received.
Limit deductions to standard, reasonable items
Determining which amounts may be deducted from the revenue is important.
Common deductions include:
- Refunds
- Chargebacks
- Platform fees (e.g., Steam’s 30%)
Developers should pay close attention to additional deductions, such as marketing costs, localisation, or QA expenses.
Make recoupment come from total revenue, not only the developer’s share
In case of a recoupment scheme, it is important to assess from which revenue the publisher investment will be recouped.
In most contracts, the publisher investment is deemed to be recouped in case the total amount of revenue that is retained is equal to the publisher investment.
An 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 investment is deemed to be recouped in case the developer’s share of the Net Revenue equals the publisher’s investment. This actually means that the publisher wants to recoup its investment through the developer’s portion of revenues (rather than its own). The effect of such a structure is that once the investment has actually been recouped, the publisher will have also made a certain profit.
An 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;
- This means that the publisher has recouped its investment when the developer’s share of Net Revenue equals € 500,000, which is the case when the Net Revenue is € 1,000,000.
- By the time the publisher has recouped, they made a profit of € 500,000.
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Clarify whether future investments trigger new recoupment cycles
One important thing to take into account, is what is going to happen with future publisher investments after the initial recoupment.
Imagine a scenario where the publisher has initially invested € 500.000 in the development & marketing of your game. Within the first quarter after release, this amount is recouped and you receive the actual revenue share that has been agreed upon. However, to increase the commercial success of the video game, the publisher determines to spend another € 50.000 on marketing. The publishing agreement plainly 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 to recoup its investment.
In this case, the potential effect could be that there is a new recoup scenario where the developer does not receive any royalties until the additional investment of € 50.000 is recouped as well.
Assess whether the developer can survive financially until royalties arrive
Royalties are often delayed due to recoupment. Developer should consider whether they can actually financially survive until the moment it receives the first royalties.
This is in the best interest of both parties, as the publisher also requires the developer to perform certain post-release obligations, including providing technical support.
Before you sign: summary and next steps
Royalties, Net Revenue, and recoupment are the backbone of a publishing agreement’s financial model. For developers, the key is to make sure revenue is defined broadly, deductions are fair, recoupment comes from total Net Revenue (not just their share), and future investments do not trap them in endless new recoup cycles. Just as importantly, they need to plan whether their studio can stay afloat until royalties start arriving.
If you’d like a second opinion on your royalty clause, send it over. We’ll highlight where definitions or recoup terms could disadvantage you and suggest clear alternatives that balance fairness with financial reality.