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Death of Dreams: What Happens When Game Studios Shut Down

Visceral. Motiga. Runic. Capcom Vancouver. Boss Key. Bandai Namco Vancouver.

Telltale Games.

These are just some of the studios that have been closed in 2018, causing more than 1,000 jobs to evaporate. They join beloved companies like Sony Liverpool, Lionhead, Vigil, Team Bondi, Factor 5, Slant Six, Pandemic, Guerrilla Cambridge, Ensemble, Red Octane, and hundreds of others that have run out of money or been shut down by publishing parents over the decades.

In a sea of challenging years for the game industry, 2018 has been particularly hard. The most recent beat in the story is that Telltale is well and truly dead. Right after the studio laid off most of its 274 workers, Telltale CEO Pete Hawley disputed the company’s complete shutdown in a Twitter comment since deleted along with the rest of his account. (We know now the company has entered into an assignment agreement with Sherwood Partners to liquidate software and physical assets in hopes of settling any debts and claims.)

Planning for the end, even when things are good
Studio executives don’t just wake up one day and decide to close their business. Typically these are decisions made because cash is running out and a buyer or investor can’t be found. Without a financial infusion, staff can’t be paid and the lights get turned off. The key for executives is understanding when the die has been cast and closure is inevitable.

“Often in the games industry there is some cash on hand that is allocated to keeping the lights on and people paid,” says attorney Brandon Huffman, founder of Odin Law & Media. “When leadership can see the runway of available cash is running out, they should look at scenarios for potentially shutting down. Even if they don’t close and stay open 100 more years, there should be no regret from planning for the opposite.”

The problem is that few companies do fully plan for the opposite, and most smaller studios simply don’t have the means to do so. There’s a gap between what studios should do—assuming unlimited time and resources—and what they can do. And many studios wait too long to make the call, putting severance and benefit extension at risk.

“In an ideal world, as companies mature they begin to carry a ‘war chest’ of working capital that can serve to protect against ‘shocks’ to their business model, industry, or economic prospects,” says attorney Richard Hoeg of Hoeg Law. “I think even Telltale management would have loved for that to have been the case. That ideal world, however, is often as far away for businesses as it might be for individuals—who generally would also like to have a bit more in their ‘rainy day’ checking account than they already do. In terms of a redline, it is not uncommon for more mature industries—and often more heavily regulated ones—to do ‘shock tests’ to war game out what might happen ‘if the Dow fell 1,000 points’ or ‘we lose our two primary contracts on the same day’, etc.

“Most companies are not, in my experience, so mature. In my career, I could not even count the number of times that a Series A or convertible debt round needs to be closed ‘by Friday’ in order to make payroll. A lot of companies run very close to the line; not necessarily out of malice, but because their management feels that bleeding edge expansion is the way they are going to succeed. Sometimes they are right. Often they are wrong.”

The human cost of shutting down
As Huffman writes in a recent blog post about business closure, “there will be blood.” Layoffs are an inevitability when a company finds itself in financial trouble. Whether a full shutdown is imminent or not, certain steps must be taken to ensure that employees are taken care of in accordance with the law.

Severance is not mandatory for employees, and it is rarely afforded to contractors (unless otherwise contractually stipulated). Final paychecks must be disbursed according to state law. Some locales require that at the time of dismissal. Others allow for compensation to be forwarded during normal payroll cycles.

The other big issue in the United States is continuation of health care benefits. If an employee was participating in company-supported health insurance, they are entitled to continue receiving those benefits by paying out of pocket through the Consolidated Omnibus Budget Reconciliation Act (we just call it “COBRA”). This lasts for up to 18 months, but it isn’t cheap. Health insurance in America costs on average $440 for single coverage, according to eHealth. That balloons to nearly $1,200 if you have a full family. Mind you, this is an expense that emerges concurrently with losing an income.

In the case of Telltale, employees are even in the rare situation of losing access to their COBRA coverage just two months into the eighteen they should have been afforded. This is completely legal in the case of a company closure. Without an active health insurance contract between the provider and the employer, there’s no longer a plan for laid-off employees to utilize.

“Getting laid off is a qualifying event to get on a health plan not during open enrollment, so they can still go for insurance on the exchanges,” Huffman says. “It’s not a great position to be in.”

It’s impossible for an outsider to say if Telltale should have acted sooner in hopes of protecting employees and offering some form of severance. As Variety previously reported, there was a last-ditch effort to secure funding from AMC and Smilegate. With hopes this would come through, Telltale is assumed to have kept employees in the dark entirely.

“It is easy enough in hindsight to say that folks should have been told that things were this close, but here’s the issue: employees talk,” Hoeg explains. “If Telltale has a meeting in the weeks before a major financing event and tells employees that the company might not survive, the company’s primary asset, the reason financing sources would even choose to invest—it’s people—become more likely to start looking for another port in the storm, and likely tell someone like Variety about what’s going on.  Once that happens, the chance of receiving that financing becomes much, much less likely. So, to prevent ‘a run on the bank,’ it is not at all unusual to keep employees in the dark on something like this, because that route leads to the highest probability of success.”

There is a worse scenario than what Telltale’s former employees suffered. In December 2017, “Marvel Heroes” developer Gazillion went under. It took with it any hope of severance or accrued vacation pay for its employees. This came after weeks of furlough (unpaid, enforced time off). Furlough is employment limbo. Staff technically still have a job (should the company ever get back on better financial footing), but they aren’t getting paid. In those cases, morale tanks and employees quickly polish their resumes in hopes of landing a new job before the ax falls for good.

Layoffs are never easy, especially when they are aligned with a company closure. Often employees are escorted quickly from the premises as a security measure, compounding the shock of job loss with being ushered from the building.

“That is why you saw stories of Telltale folks getting 30 minutes or being escorted out,” Hoeg explains.  “In an IP-based company like a software developer, the assets—such as they are—can be moved on thumb drives or e-mails. Obviously, the optics could have been done better on something like this, but from the company’s perspective, you simply don’t know who’s going to throw a computer through a window and/or steal that in-development game with $15M in costs already expended.

“The obligations of the folks running the company change from operating for the benefit of the company’s equity holders to operating for the benefit of the company’s creditors—who by the very nature of such a determination will not be receiving full payment on what is owed to them in any scenario. So the initial steps are to avoid the incurrence of additional indebtedness—like owed payroll—and preserve the assets in the best way possible. Once you move into preservation mode, the best step is often to make sure access is completely locked down.”

Employees who haven’t been let go in the first wave, like the 25 that survived Telltale’s culling, will be retasked. Working for a company that is a going concern (expected to continue in perpetuity) is different than working for one in the process of shuttering.

“Anyone staying on after the layoff needs to be on the same page about expectations and deliverables,” Huffman says. “There will be a wind-down period and having a couple of people to assist with it can be critical. However, getting people to stay in a company they know to be closing can be a challenge. This meeting, then, could turn into an honest discussion about whether an employee is willing to do that, with a contingency in place to let them go and use contractors or third party vendors to fill their role in their absence.”

Steering clear of legal issues
There are a number of legal landmines that executives might accidentally step on. Telltale may have run itself afoul of the WARN Act, by stating that it wasn’t initiating a complete shutdown and that 25 employees would be continuing “foreseeable.”

“Congress passed a law called the WARN Act which forces companies to give 60 days notice to employees if they are either going to have a mass layoff or closure,” Hoeg explains. “California—applicable to Telltale—passed a similar law. The penalty for failing to give such notice is that the company owes the employees for the applicable notice period (so in the case of Telltale, the full 60 days). The most important exception to this for our purposes relates to a financing that falls through at the last minute. That exception only applies to a full ‘plant closing’—under the federal law—or ‘termination’ under the CA law.  This is where Telltale ran into a bit of trouble when they tried to stay partially open.“

Telltale may try and reframe its earlier statements and attempt to convince a California court that its initial layoffs as the start of a closure. Regardless, the suits will continue. Whether there will be any money available for plaintiffs is another matter entirely.

“If WARN applies—remember, it might not—I think they’ll settle,” Huffman says. “Just based on what I have seen, it doesn’t seem like Telltale will have enough in assets to defend a suit or fully payout a judgment, so it’s probably in everyone’s best interest to settle fast and get something rather than nothing.”

Shutting a company down is a process that involves communication with key vendors and stakeholders. Executives and board members need to let insurance providers know the company is closing and collect any outstanding monies owed via accounts receivable either directly or by selling the accounts to a collection agency.

Huffman also advises that contracts may guide the disposition of contracts. Some licensing agreements may dictate that company closure is tantamount to defaulting on the deal. In those cases, rights may revert. This is likely why some Telltale games, including “Back to the Future” and “Jurassic Park” were removed from sale upon the company’s notice of intent to liquidate.

Bankruptcy isn’t always the answer (or the end). A Chapter 11 bankruptcy allows a company to reorganize and, possibly, get back on its feet. Chapter 7 bankruptcy, on the other hand, leads to full dissolution and liquidation. An assignment agreement, like Telltale has signed, has the same result as a Chapter 7 bankruptcy, without as much legal red tape.

Before the end, corporations need to settle any outstanding lawsuits. Any funds left over needs to be spent to reimburse secured debts (those with ties to specific assets). After that, a final tax return is filed and, should there be any funds left, shareholders will receive a disbursement.

From there, the pages of history are all that remain.

What about studios owned by large publishers?
Part of any discussion publishers have when considering acquiring, building, or growing a studio is about where to invest. Overhead and geography are considered, of course, and studios in competitive markets like San Francisco, Vancouver, Seattle, and Montreal are always at risk of high turnover. In regions where both opportunities abound and compensation is competitive, it’s harder to retain your best people.

These aren’t typically factors when closing a studio, though. Those decisions often start with prototyping progress, project viability, and talent mix.

While Telltale has been the focus of much of the layoff and shutdown conversation, it isn’t the only company to go through the process in the past few years. Capcom, Take-Two, Bandai Namco, EA, Activision, Sony, Microsoft, and more have shuttered studios.

It’s always somber. Lives, potentially hundreds of them, are instantly thrown into upheaval.

Mega-publishers are often considered the mustache-twirling victim during a shutdown. There’s a misconception among consumers that we’re in an empathy-free cycle of acquisition or studio creation and closure. There is little divide in contemporary game development culture between studio leadership and publishing decision makers. Studio leaders are often engaged in conversations from the beginning when layoffs or shutdown is a possibility.

Those same decisions go all the way to the top of most publishing companies. The CEO or a close subordinate is intimately involved, often helping to brainstorm ways to either keep a studio open or retain its people in other roles.

These decisions aren’t taken lightly, according to a representative from a major publisher. A number of factors are considered, with the chief among them being impact on the people working in the studios that might be affected.

When a decision is made to initiate a layoff or studio closure, it involves a number of departments. Human resources work to help transition staff, find internal job placements, and schedule job fairs featuring other studios and publishers. Studio leads and publisher representatives work to help wind things down and transition as many people as possible. The legal team is involved to ensure that everything is handled in accordance with federal and state statutes. The facilities and real estate departments help close the physical space and dispose of or relocate equipment.

Some companies work through a role-by-role internal search to match people with new opportunities at other studios owned by the publisher. In some cases, this can lower job loss at a closed studio by 50 percent or more. Some instances have even seen close to 100 percent placement in other roles both internal to the publisher and comparable in role and compensation.

If a role can’t be found, major publishers typically offer months of severance and benefit extension. This is variable based on a number of factors, including tenure and role prior to the layoffs.

Things to remember
Huffman and Hoeg both urge that studios plan for the end, even during good times. One missed milestone, a contract falling through, or a key investor pulling funding can cause a healthy ship to begin to capsize. No matter how big a company grows, it can be cut down with a few bad decisions or bad economic turn.

Hoeg summarizes Telltale and other companies that have soared high and crashed hard.

“[It] appears to be similar to that of every ‘VH-1 Behind the Music’ that ever was: a small, little-known talent is rocketed to success on the back of a one-hit wonder and their tastes expand to meet their newfound prominence without the slow growth curve necessary to really sustain that success,” he says. “It’s a tale you hear a lot in my neck of the woods—venture capital and technology. It’s not the start-up that kills you. It’s the success.”

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