Dear Reader,
Welcome to the third in my new series of developer journals! These developer journals aren't about Chronicles of Elyria or Kingdoms of Elyria. Instead, they're about Soulbound Studios and myself, the challenges and struggles we've faced, and the lessons we've learned.
So unlike the CoE Development Updates, which are intended for our backers and community members, these developer journals are primarily targeted at anyone interested in the game industry or running a business. Most topics will be about leadership, funding, financing, company culture, etc. Of course, I occasionally do a deep dive into technical jargon when the mood strikes.
In last month's developer journal, I did a reasonably thorough review of the learnings and struggles I've experienced in the previous three years since letting go of the majority of our development team and communicating to our backers that we were temporarily suspending development while we found a new path forward that didn't involve crowdfunding. If that interests you, check out the link above.
In this month's blog post, I wanted to give current and future business owners - particularly game developers - an understanding of the actual and hidden costs of running a small game studio (avg. 17 employees). Very few such breakdowns exist, so I hope this proves to be a valuable resource for others.
If you run a business or game studio and find this information helpful, don't hesitate to contact me on Discord under the name 'caspian,' via email at contact(at)soulboundstudiosdotcom, or via LinkedIn. While Soulbound Studios has always run on the lean side, I'd love to hear whether these numbers coincide with your experience. I'm also interested in hearing ways I can better utilize our cash flow in the future. Let's get to it!
Standard terms used in accounting all mean slightly different yet related things. My goal for this blog is to do something other than require a degree in accounting to get value from it, so please allow me to simplify things a bit.
While the above terms have different meanings in accounting, primarily based on the payment schedule or whether an asset has been consumed, this blog post shows the costs of running a game studio, on average, including capital expenses when necessary to support employees.
For this blog post, I'm not going to bother with semantics. I'll be using the generic terms "costs" and "expenses" interchangeably to mean any money that was paid by Soulbound Studios over the three years from 2017 to 2019, regardless of whether it was for goods, services, or taxes, fixed or recurring payments, with or without long-term depreciable value. If Soulbound spent money, it was a cost/expense for the purpose of this blog post.
Generally speaking, money comes out of a corporate account for three reasons.
Category one is all the costs you pay to the government for doing business. Category two is all your payments to others for running/operating the business. Category three is all the cash you pay to yourselves for owning the business. I've included all three categories in the tables below.
While I could have just used averages or approximations for this blog post and achieved the same results, I decided to pull the information for this blog post directly from Soulbound Studio's P&Ls (profit and loss statements) for the years 2017-2019. The below information is 100% reconcilable with our bank records.
That being said, I didn't want to do an exhaustive breakdown of categories, nor could I provide a detailed analysis of payments. So instead, the table below shows the high-level spending categories and their associated costs as averages over the three years. Below that, I'll provide descriptions with examples of the types of payments that fall into each category.
If you're still curious why I didn't do a detailed categorical breakdown or show the amounts paid by vendor or employee, allow me to explain.
NDAs
First, whenever you sign a negotiated agreement with third parties, there's often an NDA so the third party can maintain its competitive advantage in other negotiations. If you got a good deal, they don't want others to know what kind of deal they're willing to make. And if you didn't get a good deal, they want you to refrain from asking around and becoming more aggressive in the negotiation. It's the same reason many companies don't allow you to share your salary information with others (we didn't have that policy).
PII & Privacy
Second, to offer insight into how much salaries can run you, on average, to run a small game studio, it's irrelevant how much each individual made. It's also not appropriate for me to share such personal information. That being said, I'm more than happy to share my salary information in the details below.
Keeping the Goal in Focus
The goal of this blog post isn't to try and rationalize Soulbound Studio's spending or validate our transactions. The goal is to provide a resource for others that helps them better understand the types of costs they'll face when running a game studio - both actual and hidden. Since every studio's games and makeup will differ, the averages matter most, not the individual transactions.
Although Soulbound Studios was incorporated and operational in 2015 and has continued to do business since then, I've opted to keep the focus of this blog post on just the years 2017-2019. Here's why.
2015 & 2016
In 2015 the studio consisted of myself, who wasn't receiving a salary, and two part-time, independent contractors, making below industry standards. Including 2015 in the average would unnecessarily bring down the norms and paint an inaccurate picture of the ongoing operating costs.
In 2016 we were still building the studio, had fewer than the average employees from 2017-2019, and I wasn't taking a salary until about three quarters through the year. So again, including 2016 would bring down the averages and paint an unrealistic picture.
2020-2023
In 2020-2023 the studio has been operating with a skeleton crew, ranging from five individuals to just one. And throughout that period, I haven't drawn a salary. As with 2015-2016, this would dramatically bring down the averages.
The vast majority of costs throughout 2020-2023 have been legal fees that are neither representative of the previous three years from 2017-2019 nor are indicative of the average expenses for indie developers or small game studios - I hope.
The above chart shows the total spending by category over the three years from 2017-2019 on the left and the averages per year on the right. The left column is sorted alphabetically, and the right column is sorted in order from most significant cost to least.
With the above table, let's look at each category more thoroughly.
Advertising: Soulbound Studios paid a total of just over $34k from 2017 to 2019. That's an average of $11.5k per year, primarily including promoted/sponsored posts on social media sites like Facebook and Twitter. It also includes, to a much lesser degree, some swag and items we created as giveaways, like stickers, t-shirts, etc.
Banking Fees: Not surprisingly, this includes fees paid to our bank for wire transfers, interest payments, and foreign transaction fees when paying overseas independent contractors. It totals just $2600 over the three years and was the third lowest cost.
Business & Office Software: Coming in just under the top 20 at $23.5k, business and office software includes any software licenses used for day-to-day business. In particular, it includes our Microsoft 365 subscriptions and Office licenses, our Slack licenses, and Dropbox. Had we continued to work remotely in 2020, it no doubt would have included Zoom licenses as well...
Convention Costs: While this one is listed as an average over three years, I can confidently say that all $40k of the costs were accumulated in 2017, as that was the last year we went to a convention as exhibitors. In 2017 we attended both PAX East and PAX West, and the costs included payments to the convention organizers, shipping, rented media equipment, etc. If it was a cost required to attend the show (aside from travel), it's included in this category. Note that because we attended both PAX East and West, we spent about $20k per PAX to attend. Given the higher cost of shipping to Boston, it may lean slightly towards PAX East as the more expensive.
Customer Support Software: The customer support software category is for license fees we paid for any customer support software we used, such as Freshdesk from Freshworks. This comes out to just under $2k per year. Note that we employed someone on staff to be our Customer Service Lead, so don't assume that's the only cost associated with Customer Service. The software just allowed us to track and record support tickets, etc.
Education & Training: One of the most significant jobs of a CEO is to help foster and grow the skills of your employees. To that end, Soulbound Studios paid for almost any continued education requested by the employees. That included books, courses from Udemy, Pluralsight subscriptions, and even GDC Passes to attend classes.
Employee Salaries: Not surprisingly, in an industry driven by intellectual property and creative talent, employee salaries are the highest cost, coming in at just over $1M per year ($3.5M total). While I labeled it "salaries" in the table, the category includes only the net take-home pay of the employees, including myself. Social Security, Medicare, and income taxes are all under the Employment Taxes category.
With an average of 17 employees, $3.5M is a take-home pay of just $68k per employee per year. That's on the low end of the industry average but was standards-based within the studio. I used the 2014 Game Developer Salary Survey to develop our salaries after adjusting them for our region. Then I modified the wages further by increasing them by 3% per year for inflation from when that was published. Finally, I broke the salaries into tiers for junior, associate, senior, and principal titles.
While I know some companies have a policy of not sharing their salaries with others, I always felt that people largely left a company because they felt taken advantage of. I never wanted my employees to feel that way. So while I never shared their salaries with others, I made it clear upon hiring them that they were free to discuss their pay and talk to me if they needed clarification on why their income was what it was.
While I'm on this section, I wanted to quickly point out that, of the roughly $3.5 million paid to employees in salary, exactly $288,807.59 of that was paid to me from 2017 through 2019 as my salary. To save you the math, that's an average of $96,260.20 per year - less than I took home as a software engineer.
Additionally, if you were to calculate the averages, you'd find that my pay was 8.27% of the total. With 17 employees, my allotment would be 5.88% if we were all paid the same. As you can see, I was paid about 50% more than the average, and it's true that with $96k per year in take-home pay, I was generally, but not always, the highest-paid person in the studio.
Employment Taxes: This includes all the federal withholdings paid to the IRS, such as withheld income taxes, social security, and Medicare. Employment Taxes is one of those often overlooked hidden costs. As you can see from the chart, in addition to the money your employees take home, you must pay almost 30% additional to the IRS. Some of that is withheld from employee paychecks, but some is the company's obligation to pay.
Food & Entertainment: While only about $11k over the three years, this category is essential for the business. This fund was used to pay for morale events such as company picnics and parties, company lunches during crunch times, paying for candidate lunches when people came for interviews, and paying for coffee or lunch during offsite business meetings. It's not much and wasn't a significant portion of our spending, but it's sometimes important to bring the team together.
Furniture: While most of the furniture costs we accumulated in 2016, we paid for a couple of employees to get "sit/stand," convertible desks in 2017-2019 and again in early 2020. The health of your employees can't be overstated.
General Liability Insurance: When you operate a business within a commercial office space, you'll be required to get general liability insurance in case you cause any damage to the property.
Health Insurance Premiums: This is another "hidden" cost. Unfortunately, in the United States, it's become the obligation of companies rather than the government to provide healthcare for citizens. You can choose not to, but since this is generally a "make or break" deal when candidates apply, you should assume 75% of your employees will opt for group health insurance. As you can see, it adds another ~10% on top of employee net pay.
While I'm on the subject, please allow me to get on my soapbox for a moment. It makes no sense to have a society where only the employed benefit from group health. It's especially problematic if, say, a global pandemic forces companies to lay off employees. Because, you know, then there's a medical crisis, and nobody has medical insurance. It's illogical and irresponsible. Ok, I'm done.
Hiring Expenses: Hiring is expensive. While it would be great for all the best candidates to come to you, you often must seek them out. At the very least, you need to make the fact that you're hiring known to others. Also, when someone wants to interview, you occasionally have to pay for flights, hotels, etc., for them to visit the studio. So throughout 2017-2019, Soulbound Studios spent just over $20k to recruit, interview, and hire candidates.
Hosting & Registration Fees: Our cloud hosting fees include all the compute costs for our game servers, web servers, CDNs, load balancers, Perforce Servers, Atlassian Servers, and, when used our simulation machines. It also includes all of our SQL Servers and backup storage. We tried different combinations of various cloud providers and made payments to Amazon AWS, DigitalOcean, and Vultr at overlapping periods. This category also includes payments for SSL certificates and domain registration.
Independent Contractor Fees: While most of our ICs were in 2016 and from 2020 onwards, we had about $90k in contractor fees from 2017-2019. These fees were primarily for animators who worked remotely, part-time, using their hardware & resources, set their hours, and freely took on other clients. Nothing beats independent contractors for short-term projects and flexibility. Although, there's often an overhead cost to managing them. For every few remote contractors you use, assume you'll need someone internal to oversee the quality of their work.
Internet: Yep. Businesses also have to pay for internet access. Generally, it's slower speeds than you can get for residential service and 3x as expensive. But it's "reliable." Mostly.
Loan Payments: In addition to the crowdfunding we brought in from 2016-2019, and the money I contributed to the company, I also obtained business loans to buffer us in the months we had little crowdfunding. Like an individual, a business must repay its lenders regularly.
Marketing & SMM Software: This category is often overlooked. Marketing and social media management software includes things like Mailchimp, Hootsuite, and similar tools. These tools generally charge by the number of messages you send out. When you've over 100k registered accounts and send monthly newsletters, it can get expensive. In this case, it costs an average of about $12k per year to communicate with our communities via email and social media from 2017-2019.
Office Expenses: This one is a catch-all that includes the everyday costs of running the office. It has purchases from Amazon, Target, Home Depot, Office Depot, and similar stores for keeping the office space stocked with dishes, utensils, stationery, printer ink, stamps, envelopes, boxes, etc. It also included subscription services for coffee and water. It was expensed to this category if someone in the office wanted to eat or drink, mail or ship something, print something, etc. Oh, and we occasionally needed to have new keys made for the office. That also fell into this category.
Office Lease: Soulbound Studios moved into our first office space in early 2016 after looking at different locations with a broker for a few weeks. We finally settled on a place in Bellevue. It was the cheapest we could find that fit our space needs. It had one large open room for the team, a conference room, a room we could use for motion capture, an office for myself for calls and meetings, and a room we used for our live streams.
We kept that office until 2019, when the lease expired. At that point, the landlord would increase the rate for the same space, so we negotiated a move into the building next door with the same owner. We expanded our floor space by roughly 100% for only about 80% more than we were already paying and only about 50% of what the new rate would have been.
The new location had separate spaces for artists and programmers, more conference rooms for interviews and meetings, a larger motion capture studio with high ceilings, and more offices for the team leaders and producers. It also had a dedicated office for live streams removed from the rest of the studio, so it was quieter.
Payroll Processing Fees: Like many other companies, we paid for payroll processing through a third party. These were our fees paid for making payroll and processing 1099s for ICs.
PC Hardware: This section is self-explanatory and includes PCs, monitors, networking equipment, routers, keyboard & mice, etc. For informational purposes, we built all of our workstations at Soulbound Studios, which consisted of 20+ machines that were more or less the same and contained:
These were by no means top-of-the-line. And while it's not uncommon for companies to do hardware "refreshes" every 3-5 years, we never upgraded our machines, aside from swapping in new video cards as necessary. We found that our specs were suitable for development, and as they began to age, they were good target specs for our players anyways.
In addition to the above specs, each employee had at least two monitors, with programmers generally having three and artists occasionally having two plus a Wacom Cintiq.
Production Software: In addition to customer support software and development software, we also paid for licenses for various Atlassian products such as Confluence and Jira and our Perforce licenses, which we used for our version control solution. The average cost for our production software was about $10k per year, most of which included perpetual licenses, per seat, for Perforce.
Professional Services Fees: It became apparent quickly that even a small studio needs accounting and legal services. Like many small companies, we paid a third party for our accounting and federal tax filings. We also paid for outside general counsel to handle all transactional law, including drafting and reviewing contracts, filing for copyrights, and similar things. We were fortunate not to have to deal with any litigation between 2017 and 2019, as litigation is where things get expensive.
Research: As CEO, it was important that my team not just develop games but also play them. This improved team morale and allowed us to do competitive research and prime our creativity. While it was only about $500 per year, I encouraged the employees to let the studio pay for games or movies they wanted to experience that could inspire them to do better work.
Secure Storage Space: When not at a convention, all of our equipment, crates, extra monitors, excess furniture, etc., was stored at an offsite storage facility. These are just the storage fees.
Software Licenses: This was the fourth most expensive category at Soulbound Studios from 2017-2019 and is an employee-related cost. It includes the software licenses for all our development tools and licensed engines. Among those were software licenses to MSDN, the Adobe suite, Autodesk software, Substance tools, Marvelous Designer, The Unreal Engine, Houdini, Speedtree, World Machine, and others. It also included licensed purchases of plugins and assets from the Unreal Marketplace and third-party asset providers that sold textures and materials. If it was software or digital assets required to ship CoE that wasn't production or office related, it fell into this category.
State Licenses & Taxes: Similar to the Employment Taxes category listed above, companies must pay state and local B&O taxes, sales taxes, unemployment insurance, worker's compensation, and fees for the state Paid Family and Medical Leave Act.
Travel: This category includes the travel costs incurred by myself and other employees exclusively for business travel. This had airplane, hotel, Uber, bus, and parking costs for travel to PAX East and any trips taken to meet with partners and associates.
Owner Distributions: This one is perhaps the most difficult to explain, yet, it is still the sixth most expensive item on the list. That's why I saved it for last. If you look at the list above, there's one category that you might expect to see but have yet to see. Federal Income Taxes. Even though Soulbound Studios generated income, in the United States, organizations of certain types do not pay business/income taxes directly.
Instead, Sole Proprietorships, Partnerships, LLCs, and S-Corps have pass-through taxation. That means the organization's owners/members/shareholders must individually pay taxes on their share of the company's taxable income. For example, suppose you're the sole owner of a hypothetical S-Corp that generates $10 million in taxable income for the year, but your "salary" is only $100k. In that case, you're still responsible for paying household income taxes as though your family earned the total amount. That puts an unfair tax burden on the owners of the organization.
As a result, it's common for LLCs and S-Corps to pay their members/shareholders distributions to help cover the costs of income taxes they owe. That way, the company effectively pays its own income taxes rather than passing the burden on to the owners.
The only withdrawals I ever made from the Soulbound Studios' bank account were for owner distributions, and all distributions were immediately sent to the IRS. As you can see, I withdrew, on average, about $75k per year, which was sent to the IRS. More specifically, I removed $233.5k from 2017 to 2019.
In the interest of helping future business owners understand the startup costs of running a business, from 2015 to 2019, I deposited $477k in capital contributions. If you're keeping a scorecard, I deposited $477k, withdrew $233k to pay taxes, and paid myself an average of around $120k per year - less than I made as a software engineer before starting Soulbound Studios. In addition, I worked without income for 3/4 of 2016 and have since worked without payment from 2020 to the present. While my circumstances are unique, they're not unheard of. If you're starting a game company to "get rich quick," you will be disappointed.
Crowdfunding Policies & Legislation
Rewards-based crowdfunding is still a relatively new way of raising capital, and the policies and legislation around it are still in flux. Different state and federal organizations view rewards-based crowdfunding differently - generally, whichever way is least favorable to you. For example, the IRS considers it income, not investment. So despite the need to use it for ongoing product development, you'll give the IRS a non-trivial amount. Meanwhile, the United States Patent and Trademark Office doesn't view it as "doing business." So you'll constantly renew your copyrights until your product ships, which will involve continued legal fees.
The main takeaway here is although rewards-based crowdfunding can seem like a great way to gain the capital you need to build a product, there are plenty of unexpected gotchas out there.
Furthermore, while crowdfunding was initially developed as a way to "kickstart" product development, acting as a seed round of funding that enabled people to do things they couldn't otherwise have done, it's since changed into more of an advertising or supply chain tool, with many people waiting until they've already got a product to launch a crowdfunding campaign; using the funds to pay for scale-out like manufacturing or distribution. So now it's used as less of a "seed round" and more like a "Series-A" round of financing.
On the one hand, I wonder if the recent approach provides the same opportunities for innovation as the original intent. On the other hand, waiting for companies to have a completed product before crowdfunding offers less risk and affords more protection to backers. So, would I recommend rewards-based crowdfunding to others? No. At least not as a seed round of financing.
Payroll Taxes & Medical Insurance
Salaries are expensive, but there are hidden costs associated with employment. In particular, payroll taxes and medical insurance. As you'll see below, the average cost per employee per year is about 45% higher than their base salary. The most significant contribution comes from Employment Taxes and Health Insurance premiums. Be prepared for that.
Contractual vs. Residual Capital
With fixed, contractual income, you receive a known, pre-arranged amount of capital whenever you meet specific milestones. That's the traditional way publishers and game studios have worked together. The benefit to this is that you can make forecasts about which roles you'll need at what stage of development and can be confident when you make hires that you'll be able to afford them for the long term. Also, when there's a contractual arrangement to fund the complete development of a game, you can confidently tell your employee candidates that the funds are there to finish the project.
In contrast, with residual income such as crowdfunding, the amount of money you'll bring in next month, next quarter, or even next year is highly variable. It is vulnerable to community and public sentiment, the economy, and catastrophic events like global pandemics.
You always have a runway, even if it's constantly shifting back, at which point you'll run out of money. That's a difficult sell when interviewing candidates, as most want to know how long the runway is and don't like what they hear. Nobody wants to change jobs or relocate to a new city or state for a company that knows it'll run out of money in 18, 12, or even six months. You must be confident in the product or the leadership to take such a leap of faith.
On the other side of the table, as an employer relying on crowdfunding or residual income, hiring new people is challenging when you can't say you'll be able to keep them employed for longer than 6-12 months with 100% certainty. It's a super stressful existence, and, in general, I don't recommend it.
That's one of the main reasons I decided to pivot the company's operating model from one based on crowdfunding to another based on collected revenue. I once attended a GDC session from another executive in the industry that said there are three types of money when you're running a company: Money you will have, money you think you have but don't, and money you actually have. You should only do business and make decisions based on the last one, but knowing the difference is often difficult. Relatable.
Professional Liability/E&O Insurance
Another lesson I've learned is to always, always have Professional Liability Insurance. I didn't know what that was when I founded Soulbound Studios; by the time I learned what it was, it was too late. While Soulbound Studios had General Liability Insurance to protect our landlord from damage that could be caused to their building, professional liability insurance protects your company against lawsuits.
Often, perception is more powerful than reality, especially in the game industry. And for better or worse, in the United States, people can sue you for just about anything they can convince a lawyer to sue you over. And according to the American Rule, unless expressly stated otherwise, each party to a lawsuit must cover their own legal fees, regardless of the outcome.
That creates a situation where, if there's value in your company's IP that could benefit a lawyer and someone has a grudge against you for perceived wrong-doings, you can be sued into bankruptcy if you allow it. Professional Liability offers some protection against this. Please don't do business without it.
The Cost of Not Hiring
The last point I wanted to make goes back to residual income and the cost of hiring. I mentioned before that when you're staring at a runway, the decision to hire more people can seem like negligence. That seems like more people you'd have to let go of, right? At one point, I didn't want to hire another programmer as doing so seemed prohibitively expensive. Each programmer appeared to reduce the runway dramatically.
But, in 2019, I joined an advisory board to become a better CEO and leader. At one point, I met with the chair to get advice on what to do in this circumstance. I told the chair that I'd had difficulty finding programmers, so I'd specifically hired designers who could act as "Technical Designers" and do some of the work a programmer could do. Should I continue relying on them since they have the skills, or hire more programmers? The chair had me estimate the percentage of time the technical designers did things a programmer could do.
He then pointed out that I was still "paying" for the programmers anyways. It was just being paid to the designers instead. People who were objectively less effective at the role and were spending their time doing that instead of designing. That was slowing down development and increasing the number of months needed to complete the project. He reminded me that each month spent on the project was a month spent paying for everyone in the studio, not just the additional programmer.
In doing so, he pointed out that while I was afraid of hiring someone at the risk of shortening the runway, I was prolonging the project, resulting in higher overall costs. While I was succeeding in slowing down our progress toward the end of the runway, I was slowing down our progress even more. I hired another programmer the next month and two more technical designers to catch up on the design work I'd allowed to fall behind.
If you're still here, thanks for reading this lengthy dev blog. Hopefully, you found it informative. Before I end it, I wanted to quickly wrap up by providing two other critical pieces of information which, while they could have been calculated from the above information, I'm providing explicitly to help future/other business owners make good decisions.
First, given the above, the average monthly cost for running Soulbound Studios from 2017 to 2020, a company with an average of 17 employees, was $190,121.14. That fluctuated monthly based on the number of employees we had, the current lease, and whether quarterly or annual taxes were due. However, if earmarked appropriately, that monthly average should still give you everything you need to prepare for the highs and lows.
The other thing I wanted to point out is that many of the costs described above are a function of the number of employees you have. Each new employee has a required salary, payroll taxes, development tools, office furniture and space, computer hardware, and medical insurance.
The above table shows the costs most likely to scale with additional employees. The first column shows the average cost per category per year, and the second column shows the average per employee.
Below the table are two additional values, the average cost per employee per year at Soulbound Studios and the average salary per employee. Note that Soulbound Studios paid sick leave and PTO but did not pay bonuses - to anyone, not even me. The costs above are 100% of the benefit any employee received. As you can see from the table, while salaries change from role to role and from experience to experience, a good average per employee to consider is about $120k as of 2019 in the Pacific Northwest.
Finally, by taking the average net payment to employees of $68k and adding back 50% of the employment taxes ($25k), you can see that the average salary per employee at Soulbound Studios was about $80k.
If you've read this far, thank you for joining me. If the above information proves valuable to even one other current - or even better - future CEO in the game industry, then it was more than worth the time it took to prepare and write it.
As one final reminder, I can be reached on Discord under the name 'caspian,' via email at contact(at)soulboundstudiosdotcom, or via LinkedIn with my real name, Jeromy Walsh, if you have further questions, suggestions, stories, or advice.
Cheers!
Caspian