An increasing number of Texas companies are creating electronic medium products: software, mobile applications and video games. Software app and video game entrepreneurs (“SAVaGEs”) include digital arts and entertainment product developers, investors, resellers, publishers, and distributors, as well as the consultants and technicians who help create, deploy, market, and/or maintain these products.

SAVaGE companies face many of the same challenges as traditional businesses, but also must address additional legal challenges because of the mercurial, non-physical nature of digital assets and operations.

Entity Structure

SAVaGEs should consider forming a legal entity, such as a corporation or limited liability company (“LLC”), as soon as possible. These legal entities provide personal asset protection for the owners and managers from business debts, and can also provide a more palatable structure for potential investors. There is no single entity type or jurisdiction that is ideal for all SAVaGEs and the proper entity choice should be made only after discussion with legal and tax counselors.

Funding

Like all businesses, cash is critical for SAVaGE enterprises. Many are initially self-funded, but often need outside financing moving forward. Financing options include selling equity, loans and royalty-based financing.

Selling equity is a common source of capital for early stage ventures, but SAVaGEs must follow all securities laws and be careful to retain control. This caveat applies to both cash investors and “equity for service” arrangements with developers and partners. Debt and royalty-based financing can be difficult to obtain for early stage companies, except at outrageous interest rates. Regardless of the source of funding, SAVaGEs will want to ensure that all transactions are well documented using comprehensive agreements prepared by experienced legal counsel.

Taxes

SAVaGE products can be sold, licensed and accessed from virtually anywhere, which means a variety of governments may have an interest in taxing these transactions. It is important that SAVaGEs discuss the tax implications of where and how they make money.

Intellectual Property

Since Intellectual Property (“IP”) will represent virtually all the value of the SAVaGE company, SAVaGEs must appreciate the importance of comprehensive IP protection. IP includes: copyrights, patents, trademarks and trade secrets, and SAVaGEs will typically need to protect all four types of IP to adequately protect their assets. A well-focused IP strategy adequately identifies, secures, and enforces all IP assets – both in the U.S., and abroad.

SAVaGE companies must clearly address all issues regarding IP ownership during the development process and limit trade secret exposure from the competition. In some instances, company entity documents can directly address IP rights, confidentiality, or non-competition (e.g., in the LLC company agreement). Additionally, all owners, investors, directors, advisors, officers, employees and contractors should sign agreements to protect against the loss of trade secrets, and to transfer the ownership of any IP developments to the company.

eCommerce

Prior to accessing or using a SAVaGE product or website, users of SAVaGE products should first agree to a license, often called the “Terms of Use” or “End User License Agreement” (“EULA”). The EULA outlines the rights and responsibilities of the company and the user, and should comprehensively address all areas of concern and vulnerability for SAVaGEs. Users must also agree to a privacy policy that outlines what data will be collected and how it will be used. User data can be a valuable asset to SAVaGEs, but they must ensure not to violate the myriad of state, federal (and even foreign) data privacy laws.

Conclusion

SAVaGEs represent a growing industry segment, and it is important that SAVaGEs consult with legal counsel and business and tax professionals who are experienced in handling special issues and challenges SAVaGEs face.