How to enable Dutch gamedev startups to succeed

April 1, 2016

The Netherlands is a beautiful place with diverse culture and a relaxing lifestyle. It's great if you want to have a good work-life balance. What's not great about it though is the climate for start-ups and the tax system associated with it.

 

This post is both an open letter to the Dutch tax authorities and a perspective for the worldwide game development scene on what it really takes to run a studio here.

 

 

I'm just going to give an example of what a typical studio start-up that wants to develop a game needs, implications in today's situation, and an example of how it was done right at other places in the EU.

 

So you're going to start a game development studio!

 

Let's assume the product is already prototyped during a game jam. So you know the game's core mechanic has traction, you've developed it with a friend, and the game jam-created prototype is being played by Youtubers. That's a good start. It's exactly how Party Hard and Punch Club started.

 

 

Example of Punch Club
 

The development budget for Punch Club was under 80k Euros. The game was created during Game Jam Kanobu and went onto making over $2m in its first month. It was featured by Twitch, Steam, Apple, Google, and got industry-wide acceptance. If the game costed twice as much to make, it wouldn't exist.

 

How Punch Club Made $2m -- VentureBeat article

 

 

For clarification, a game jam is a short-term event (2 days, 24 hours, 72 hours) where developers come together to rapidly develop video games. These video games usually take unconventional approaches to the process of game development, and result in original ideas that -- even at prototype stage -- show promise and can "go viral".

 

You've got your prototype. Let's assume you had a mid-level job, no mortgage, and you're flexible. You're an entrepreneur, and this is your chance to build a business. If it succeeds, you'll grow a company that employs dozens of people, and the start-up will turn into an actual business.

 

Now you need to develop the game.

 

You need a small team.

 

The minimum wage in the Netherlands is roughly 1,500/month before income taxes. This would net people just over 1,200 euros/month which is rather difficult to get by, and no experienced professional would agree to such a salary, even with a revenue share.

 

Let's make a bold assumption you can both get people to work for minimum wage and a revenue share on the product -- at minimum wage.

 

So you're a team of 5 working on a game for a year at minimum wage. Here are the rough costs:

 

 

Super optimistic scenario with everyone on minimum wage

 

 

 

*I put the social overhead sum here to illustrate how much the invisible cost is, the one that goes unnoticed when you're hiring someone. It is about 40-45% on top of the normal salary, before income taxes kick in.

 

The Total Cost/month column indicates the total social overhead costs. These are usually 40-45% on top. This is what you don't usually see in your payslips. It's the hidden cost of employing people.

I'm also making the assumption you find a cheap office space for 500 euro/month -- mind you that the actual rent of the office should be about 350-400, and you need an extra 100-150 per month on utilities such as heating, electricity, internet.

 

Odds are someone's laptop will fail, or that you'd need to upgrade some equipment. So let's just have 500 euros per person for cheap laptops.

 

You're all set, and the grand total comes up to almost 140k euros. Over 40k of that will be social overhead taxes that nobody speaks of.

 

Let's be realistic though, and assume everyone gets above minimum wage -- has some experience and actually has rent costs.

 

 

 

 

In this situation I make a nice round number of 2.5k euros per month per person. The total comes to 230k Euros with slightly better laptops and a slightly better office -- obviously some costs will shift around, maybe you'll need to buy desks or whatnot.

 

This looks like a much more realistic scenario for a game developed in a year, based on a proven game jam prototype. Even if it takes you 9 months to develop it, you'll still have space for testing, polish, etc.

 

This doesn't include any marketing costs obviously, or trips to conventions. You can already see it's not exactly doable.

 

I've been thinking about it and trying to come up with a recommendation of how to improve the situation. I'm not going to dive into the contractual obligations part -- where according to Dutch law employers need to give out permanent contracts eventually, how for a 1 year contract if you fire someone, you still pay for 1 year, etc. That's a separate story. I wanted to try and imagine what would make a small company want to scale up and actually take chances on innovation, or something that'd make people want to start a company together and grow into a mature business.

 

A Possible Solution

 

One idea came to mind, and I'm just shamelessly mirroring it here. It originates from Latvia, my home country, where they recently created the concept of a "Micro-LLC". It's a special company type that has everything an LLC would (or "BV" in the Netherlands), but has a special tax situation that enables start-up growth.

 

 

Basic stats

 

 

 

  • The company gets taxed on its turnover at a flat rate of 9% for the first 3 years

  • The turnover limit is 400k Euros (in Latvia it's 100k, but minimum wage is 5x smaller)

  • You can't employ more than 5 people

  • It has to be the only place of work for those people

  • If you cross 400k, you pay 20% on turnover of everything over

  • If you cross the limit 2 years in a row, you get bumped into the previous normal situation -- odds are you're financially healthy and can handle it

  • Everyone needs to sign papers acknowledging that they'd receive reduced benefits by working here

  • Nobody pays any income taxes, all salaries are net, and there's no social overhead.

 

 

The key part here is NET salaries for everyone after paying 9% on the turnover. Before all accountant-savvy people jump up and start screaming here, remember -- we're talking about start-ups, where time is precious and worrying about tax write-offs isn't on the top priority list. The top priority is to make everything regarding running a company as easy as possible, crystal clear and simple -- and to focus on the actual product.  This translates to a much more realistic game development budget:

 

 

*Note: the budget saved is comparing with the original "realistic" situation.

 

In here, all salaries are NET and a 1.5k net salary will be a little lower than the 2.5k gross in the original situation. So let's round that down to 100k.

 

In this situation, if we assume that 2 of the people on the team aren't getting anything -- living off savings or some other revenue stream (previous games?), the budget can go down to 60-70k which is much more realistic.

 

 

Remember, in a game development project like the one described above -- everyone needs to work full-time. This is because if a game jam prototype takes off, it's very risky to have a long development cycle -- trends might change, and the industry is too dynamic to remember something from years ago.

 

 

Most other countries have lower costs of living and/or no laws restricting contractors from working for the same client for a long time, or large social overhead costs. I understand why the Dutch tax system is built around so much taxation, but it really puts a stranglehold on small companies.

 

 

Example of No Time to Explain
 

No Time to Explain was tinyBuild's first game, and got funded on Kickstarter - raising $26k. The game went onto selling over 200k units across PC and Xbox One, and started enabled tinyBuild to co-develop the multi-million selling game SpeedRunners. To date, SpeedRunners made over $4m.

 

If The Netherlands wants to be really competitive on the international game development field, it needs to introduce a much more simplified solution for start-up companies, and I believe something as transparent as the solution described above -- with a cap on how long it can work, limits on employees, turnover, etc -- can facilitate a spark in growth of the local game development scene.

 

 

Furthermore, it could spark a whole new wave of Silicon Valley-style start-ups that attract funding for promising products -- and develop those products under favorable conditions before becoming taxed as mature businesses.

 

 

There are thousands of students graduating from game development studies every year, and just over 1,000 jobs. And that's a real problem.

 

 

 

Here's a practical example:

 

When a Dutch team submits us a pitch, it is 90% of the time disregarded because of the budget request. We have never received a budget request under 100k Euros. With the proposed solution, budgets could go down into the 50-70k range, and much more games would actually get made - funded by indie publishers like tinyBuild.

 

 

 

I am reachable by e-mail and open for providing more feedback,

 

Thanks for reading,

 

Alex Nichiporchik

alex at tinybuild dot com

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