“Loan-Out” Companies for Gaming “Talent”: Competitive Gamers and Gaming Influencers

As with many other participants in the entertainment and sports world, a U.S. business entity created by an individual competitive gamer or gaming influencer is referred to as a loan-out company. For example, “WorldWideJust, Inc.” could be a corporate entity that conveys the right to the owner’s competitive gaming performances. The loan-out company created by the gamer then provides the individual’s services as an “employee” of the loan-out entity to a third party, such as an esports organization or a sponsoring brand. As the name indicates the entity “loans out” the services of the employee (the gamer) by contracting with another party (the esports team) instead of this party (the team) contracting directly with the gamer. This means that the loan-out company executes the agreement with the third party and then “hires” the gamer to perform the work that they are contracted for. However, before the loan-out company is able to enter into agreements on behalf of the professional gamer or content creator with other parties, the individual must first sign themselves to this created entity. Ulis means, in a sense, that the gamer will actually be signing themselves to an agreement with the entity that they also are an owner of.

If an agreement is structured as such, ultimately, the corporate entity (the loan-out company), not the individual owner of it, is liable for any debts and contractual obligations of the entity. This means that the loan-out company will be the only party contractually responsible for any damage suffered by a third party so any creditors of the owner generally cannot recover against the individual’s personal assets. Therefore, it is prudent to ensure that any agreement is solely entered into with the gamer’s holding company so that the gamer will not be personally liable for any damage. In these situations, the damaged party’s only opportunity is to attempt to recover the funds from the loan-out entity (which may not have sufficient assets) without being able to recover its losses from the individual.

Business Investments and Transfers for Professional Esports Organizations and Teams

The existence of a corporate entity provides unique benefits for professional esports organizations. In particular, it enables a team to more easily structure the transfer of any of its assets. This includes transactions with any third-party investments in the organization, the sale or purchase of any professional gamer’s contracts, as well as the acquisition or transfer of an organization’s rights to a specific tournament or league “spot” or “slot.”675

With the rapid and constant changes to competitive team rosters, the ability for a team to seamlessly sign, release, trade, or otherwise transfer an existing contractual obligation is accomplished easily through an entity.6 6 In this respect, the business entity acts as a “house” that holds all of the various rights that the organization has to any players as well as to any competitive tournament or league spots. The ownership of a spot or slot in an organized league or tournament enables its owner to field a team and compete in specific events.6 7 This is in contrast to the lack thereof, which prevents a competitive team from participating in a closed-field tournament (which is an invite-only situation which is not open to the public). It is also important for a team owner to be aware that for a player or competitive slot or spot transfer to be enforceable, the organization must follow any established league or tournament regulations governing how such actions can be enacted. In many cases, the failure of a team to adhere to any existing established transfer rules could cause any transaction to be deemed invalid and not be processed.

Furthermore, with the rise in esports investments by third parties, the proper business structuring of a team provides for a much easier and seamless fundraising process. In fact, in 2018, there was a total of “over $4.5B USD in disclosed investment” spent on esports.6 8 This figure is up from the previous year’s total of “$490M” in esports-related investments.679 Of that total amount, “$258M USD” was invested directly into esports teams and organizations in the last few years.680 There has also been talk and hope for even larger organization valuations in the future.681 In particular, the amounts contributed to an esports organization have come from a variety of investment sources. These include investments from venture capital (VC) firms, private equity companies, as well as from “family offices.”682 For example, “39” different venture capitalist firms invested, including Hersh Interactive Group (invested in Team EnvyUS), Bessemer Venture Partners (invested in TeamSoloMid), WISE Ventures (purchased Minnesota Rfikkr franchise in the Call of Duty League)^ and The Kraft Group (invested in Andbox, owners of New York Subliners franchise in the Call of Duty League and the New York Excelsior franchise in the Overwatch League),684 In addition, some private equity firms have begun investing in the professional gaming space.685 For example, the Artist Capital Management, a firm that raised “$100 million” has acquired ownership stakes in esports team 100 Thieves and Overwatch League franchise, Washington Justice)^ Similar to traditional sports teams, some private family offices are investing in esports franchises.687 One such transaction was when The Jones Family (the financial vehicle for Dallas Cowboys owner Jerry Jones) and Goff Capital (the family office for the real estate investor John Goff) purchased a majority ownership in Jason Lake’s Complexity Gaming.688

Venture capital firms are the type of entities that invest in “early-stage” companies, usually those which are in a “pre-revenue” state.689 These types of investments are usually considered “riskier” due to the “lack of historical per-formance/financials” of the business, including many esports organizations.690 This is because many esports teams do not have several years or decades of financial records and analytics to substantiate its potential value. In general, private equity companies are usually much more “risk adverse” than venture capitalists.691 Thus, most private equity institutions primarily invest in a company to own either a “minority” or “majority” interest.692 However, in many of these cases, prior to any investment by these entities, “strong historical financials” in the potential investment property must be substantiated.693 Due to this fact, there have not been many private equity firms investing in esports organizations. This is because these type of financial companies are very risk-averse, so the “unpredictable cash flows” associated with esports has created barriers to investments from these institutions.69'1 Finally, a family office investment is another common type of third party investing capital in esports teams.695 These investment vehicles are owned by “wealthy individuals,” who have established “private wealth advisory firms” in an effort to “preserve [the family’s] capital as opposed to [focusing solely on] generating] significant” returns on the funds.696

There are many aspects that a potential investor may scrutinize when conducting their due diligence prior to investing in an esports team. These factors are relevant in determining whether the third party will invest their funds in an esports organization or not. One important consideration by an outside investor could be the existence of a “dedicated team training facility or gaming house.”697 This is because the existence of such a facility provides the esports organization with unique opportunities for “naming rights, on-site activations and content curation opportunities” at the premises that would be unavailable without it.698

Another factor could be whether any “consistent future revenue streams” exist.699 For instance, if an existing team is unable to currently show this, they can instead demonstrate “that there are future plans to develop consistent revenue streams.”700 This could be accomplished by providing evidence that the team intends to begin selling “merchandise” or some other new product.701 In addition, the existence of “a consistent sponsor [... even], if the dollar contribution is low, [...] could help in building a strong case for an investment” from a third party.702 Consequently, the terms and the existence of organizational “partnerships [...] may offer [... another] consistent revenue stream outside of merchandise sales” which might appeal to a prospective investor.703

In addition, other relevant factors that might assist in validating the potential “growth prospects” of a particular esports team include if the organization has a “large following on gaming and/or social media platforms”704 as well as if the organization has signed any “[m]ajor [gaming] influencers” to it.705 Potential investors may also examine “the company’s historical financials” in an effort to “verify and confirm the accuracy of the financials provided” to them.706 Furthermore, an examination of the amount of the team’s “working capital” can also be an important determining factor.707 “Working capital” is the “current operating assets less current operating liabilities” available to the organization.708

Finally, the existence of a “strong management team” that has “prior experience,” extensive industry connections, and an outlined plan for “future growth” is beneficial.709 Furthermore, another factor that third-party investors may look at and value is if the current “[m]anagement’s willingness to remain” with the team to “help minimize any potential disruptions in the business’ daily operations.”710

Overall, there are many considerations that a potential investor might take into account when determining whether or not to finance or otherwise invest in an esports team. All of these must be examined and may factor into the ultimate determination on whether a party invests.

 
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