Gaming’s golden age, as seen by one of its veteran lawyers (interview)

Dan Offner spent a couple of decades as a game industry lawyer before he joined a little company in January 2013: Oculus VR. He helped clean up its books, get its legal house in order, and then joined its rocket ride.

Oculus VR’s virtual reality goggles became a sensation for their potential to create new kinds of gaming experiences, drawing the attention of the entire world. As general counsel, Offner helped the company negotiate huge venture capital rounds and then the biggest deal of all: the sale of Oculus last spring to Facebook for $2 billion.

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Offner stayed through the close of the transaction, and then he left to start his own new law firm, Offner & Associates, to go back to both investing and offering legal advice for startups. I talked with Offner about the legal issues that game companies big and small face in the times ahead.

As we closed our talk, we talked about whether there was a bubble or not. That turned into an interesting conversation that went beyond legal matters and into the topics of investing and timing.

Here’s an edited transcript of our conversation.

GamesBeat: You seem to have disappeared for a while. Maybe disappeared inside of Oculus, I guess?

Dan Offner: I took a break, yeah. I got swallowed by the Oculus momentum and just came out the other side at the end of the summer.

GamesBeat: Are you returning to your old firm or starting a new one?

Offner: I’m starting a new law firm, Offner & Associates. I’m also starting a small angel fund, Blue Heron Ventures. That was the entity through which I invested in the series A in Oculus.

GamesBeat: How many years were you there? A couple of years or so?

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Offner: Not even? I joined Oculus in January 2013 as outside counsel. I became their general counsel shortly thereafter, when my partner George Rose, the former GC of Activision, went back to being GC at another company. I was Oculus GC from that time early in 2013 all the way up until the close of the acquisition. Then there was some time afterward as I was wrapping things up and handing them off to Facebook legal. I took a little time off to regroup and got things like letterhead and business cards sorted. Now I’m getting ready to kickstart, no pun intended, my own practice and my own angel investing firm.

GamesBeat: How many years of legal practice related to games is that for you now?

Offner: Technically, since 1992. That dates me. 22 years.

GamesBeat: Is most of that as outside counsel?

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Offner: I started off working for a firm that represented the Teenage Mutant Ninja Turtles. I was doing a lot of Game Boy deals. Then I started my own firm in 1995. That was originally Offner & Associates as well. It became Offner & Anderson. In ’95 I started working with THQ. Then, in ’96, I started working with Ubisoft, and it went from there. I sold that firm to Nixon Peabody in 2006. In 2010, I went over to Loeb & Loeb to build up their interactive entertainment practice.

GamesBeat: How did you happen to meet the Oculus folks?

Offner: I met Brendon Iribe and tried the Rift shortly after I left Loeb in 2012, when I was between things and trying to figure out what I wanted to do. I started a biz dev consulting firm. It was in November 2012 at a gaming insiders event. I thought, “Wow, this is something.”

I didn’t think of it again until George and I started working together in January. George was like, “Let’s go see Laird Malamed, the COO of Oculus, my friend from Activision. He’s working with Brendon and Palmer Luckey and these guys making VR.” We went down in January and it went from there.

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GamesBeat: How did you spend your time at Oculus? What sorts of issues did you have to pay attention to? Were you very preoccupied with things like fundraising?

Offner: We went through a classic cycle. The company had been started using Legal Zoom, and then they had put another structure in place. They were going through vertical growth. The first thing I did in January, February, and March was get the books cleaned up, both legal and accounting and everything else. I did that with Laird.

In March and April, Brendon started bringing in term sheets for the series A. The moment we said, “Okay, we’re properly legally organized and the accounting’s coming along,” he says, “We’re going to do a round, and it’s not going to be $8 million; it’s going to be $16 million.” We closed the round May 29, I believe.

As soon as we got the round closed, we rolled into, “Okay, it’s E3. We have other issues to deal with. We have to do a bunch of deals this summer.” We started working on a Samsung Gear deal back then. Then, lo and behold, it got really busy in August and September, because while people didn’t notice, we were getting ready to do the series B. We rolled into the series B and we closed that before Thanksgiving. We were on a roll.

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Then we had to do some platform deals. We had to get the Samsung deal going because we needed to build that relationship for our mobile solution. We had some other major deals we were working on. Then, presto. We closed the B round, the loose ends on that, in January or February. The next thing I knew we were getting ready to sell the company. As soon as we had gotten a task accomplished, we didn’t have very much time to catch our breath. It was, whoosh, vertical growth curve.

GamesBeat: What’s your first thought about advice for companies going through that kind of growth?

Offner: Make sure your legal house is in order. Keep it in order. Brendon and Laird were really smart and supportive of what I wanted to do with outside law firms like Bingham, our corporate counsel. Once we finished the A, we didn’t shut down keeping the due diligence up to date. We kept at it. Take that extra step, if you’re a startup company that’s going through hyper-growth or wants to. Make sure your accounting is really in order, too. Again, Brendon and Laird were good about having good accounting support and a good acting controller.

Work those fundamentals. Take the extra step to make sure you work at clearing out trademark rights and things like your copyright filing. If you do all that and keep it up, when you want to do a major transaction – whether it’s raising $75 million or selling the company for $2 billion – you’re organized and ready to go. That was one reason why we were able to be so successful. The other reasons, more important ones, were the talent of the team and the incredible product they built.

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GamesBeat: I assume you can’t talk much about Bethesda, but I would ask if that also took up a lot of your time, the lawsuit.

Offner: Short answer: I can’t comment on current litigation. Yes, it took some time.

GamesBeat: Now that you’ve left and you’re out in the industry and looking to invest, what are some things that are interesting to a lawyer about what’s happening in the game industry right now?

Offner: There are two hats I wear – lawyer and investor. The two overlap to a great degree but not always. As an investor, you would probably agree that there’s a fair amount of technological change happening in the interactive entertainment industry, driven by the CPU chips and GPU chips and falling costs. We’re going to see the rise of the cloud and connected mobile devices. We’re also going to see a further digital transformation of the interactive entertainment industry. With examples like Oculus, the Rift is plugging into a laptop or desktop that didn’t exist 10 years ago. As a result, you can have a completely immersive VR experience. So my first answer is that technology is going to change interactive entertainment for the better.

As lawyer, I think all things are mobile and all things are international. We are increasingly challenged, as lawyers, to provide good business and legal advice as the nature of the industry changes very rapidly for us. What’s a good answer for the states may not be a good answer for the EU, for example, with respect to something like privacy or even contract enforcement.

GamesBeat: Privacy seems to have gotten pretty complicated with things like mobile devices and the ability to track so many things. You can have anonymous data, but if you can use that anonymous data to sort of triangulate on someone’s identity, you can still figure out who that person is. It seems like something everyone has to be careful about.

Offner: There’s a legal answer and a practical answer. The legal answer is you’re absolutely right. There’s going to be privacy regulation at some point that better addresses those issues, but when and how I don’t know. Practically, when you look at these massive social networks, the amount of effort and energy that would have to be expended to do that type of triangulation and targeting seems maybe a little extreme. But I do think we’re going to see, on a federal level, more regulation and legislation like what the Attorney General promulgated for mobile devices in California a year or two ago.

GamesBeat: Do you have advice for companies on how to deal with GamerGate issues? There seem to be lots of different legal questions that companies are faced with when trying to figure out where they stand or communicate there.

Offner: I’ll address GamerGate this way. I find it disturbing and disappointing and offensive, especially because I have a daughter who likes to play games on my iPhone. Any advice I would give to any client relative to Gamergate has to be fact-specific, though. Generally, bullying and sexism and racism should not be tolerated and can’t be tolerated in our industry.

In the past two years, I have done deals and contracts with different companies – mobile companies and online companies – related to monitoring the type of exchanges that are going on in company game chat rooms and so on. They have to be careful that there’s not sexist or racist or bullying types of behavior being exercised in those forums. But that technology, I know, is not perfect. It has a ways to go. Collectively as an industry we have to work at addressing the problems that have arisen with GamerGate.

GamesBeat: There’s the issue of whether a company spokesperson should say anything at all. Is there advice on that front?

Offner: I’m going to bore you with my answer, but I’m not going to offer any general advice. I’d have to look at any client’s particular fact situation and give my recommendation based upon the facts and circumstances of what’s going on, whatever the particular situation as it relates to those issues in general.

GamesBeat: Would you say that the situation has become more complex, though, as far as your legal exposure? Not only in just the press releases that you issue, but what you do on social media.

Offner: Something like GamerGate illustrates, for any company, the challenges that we face related to social media. A lot of companies, a lot of my clients, have been beneficiaries of a growing social media base. Zynga built a business out of Facebook games. As much as we’ve all been the beneficiaries of social media, though, we’re now going to have to grapple with some problems there. Gamergate and situations like that are reflective of things that we as an industry have to address with social media.

GamesBeat: You mentioned that you think privacy regulation is coming. I’m wondering what game companies will have to worry about or what’s high on the list of things they should be aware of. More strict regulation with the Children’s Online Privacy Protection Act (COPPA) has kicked in as far as how you deal with children online. Is that impacting the game business much?

Offner: On the privacy side there’s a new, enhanced checklist, especially here in California. You have to be sensitive to the COPPA issues, not getting the personal information of users under the age of 13, not doing it inadvertently or collecting enough analytics that you can figure out who this person is. The regs are out on COPPA. Things have tightened up, and I think companies are sensitive to that.

You also have to grapple with a couple of other issues on the list. One is the sales tax issue. We have a couple of clients dealing with that, where you have in-app purchases where taxes may be due. You also have to deal with gift card issues and the various state regulations related to that.

You have to deal with whether your TOS and privacy policies will work beyond the United States. It may be fine domestically, in Irvine or Silicon Valley. But will it work with European safe harbor or key markets in southeast Asia? You’ve put your finger on an area where the checklist is large, unfortunately, for our clients. It’s not always so simple. It’s the privacy and e-commerce checklist — making sure you’re compliant.

As more revenue is generated online, and increasingly through mobile, these are issues that companies in the game industry will have to be more and more careful about. Otherwise they could do something for a couple of years and then end up with an unpleasant tax bill. That’s something we all want to avoid.

GamesBeat: What about virtual goods? I’m always curious about the question of who really owns them. There was a lot of talk back when about Second Life and virtual worlds.

Offner: I don’t think we have clear case law or regulation in that area, but I would need to go and look at the statutes and the cases and get back to you on that. I don’t think there’s been a tremendous amount of judicial decisions or legislation that’s said, “A virtual good is owned by the end user.” We’re still functioning somewhat in a world where the companies, to a degree, own and control the virtual items through their terms of service and end-user license agreements.

GamesBeat: The free-to-play model has been very good for monetization in the games space, especially in mobile and online. Do you foresee any issues with that model in particular? One of the premises of free-to-play in the developing world was that it was going to reduce piracy, but do you see that that has actually happened for any of your clients?

Offner: The free-to-play model, as you correctly point out, to a degree comes out of Asia where things are primarily server-based. They’re free to try and you get people to bite. When you have a server-based game, you control who, on the client side, has access to it. You can turn them on and off. So yes, it does address piracy.

I’m not sure that free-to-play is going to dominate gaming the way everybody thought it would, though. If you look at Steam as an alternative, you’ll see a lot of games – like Nether, one I invested in – where people are able to buy the game and enjoy it and play through 30 or 40 or 100 hours of gameplay or whatever it is. They’re perfectly happy to pay up front, whether it’s $30 or $25 or $15 or $3, to be able to get a great game and enjoy it on their PC without having to constantly pay to play. I’m not sold that free-to-play is going to be the only business model or the dominant game model out there in the digital space. There will be lots of others along the lines I just laid out.

GamesBeat: What is your most complicated legal issue right now? What would happen, say, if somebody bought a pirated virtual good using Bitcoins or something like that?

Offner: The legal side of things is always challenging, but it’s solvable. It’s the people that always make things challenging. It could be the people on the other side of the deal. It could be the people that are suing your company. It could be what the people at your own company want to do. People, in my business, are always the hard thing to work through.

The legal side is never easy, never simple, but you can always figure it out. Bitcoin is fascinating and we’ll see how that emerges, hopefully, as a legitimate currency. The essence of who owns what in virtual goods is an unsettled legal question. As things like the Oculus Rift come online and we see this Snow Crash kind of world — Who owns the virtual house that was paid for with Bitcoin? Is it the platform provider, the server, the person who created it? Is the currency legitimate? Those are all fascinating questions that will have to get sorted out. But having to deal with the personalities involved behind those questions will be much harder.

GamesBeat: Since you’re also thinking about investing more, what’s your feeling about whether there’s some kind of bubble going on? Do you see the flow of capital into the games industry going in any particular directions?

Offner: I think we’re the beneficiaries of a real bull market. A lot of companies have had great exits, either selling to an acquirer like Facebook or going public, so the VCs have cash. Things are much more frothy than a year and half or two years ago when we did the first Oculus round. People are getting higher valuations. Companies are getting better discounts on promissory notes. It’s a good time to be an entrepreneur.

Do I think we’ve hit the bubble stage? It’s anybody’s guess. Do I think that things are much frothier than when I left Loeb two years ago? Absolutely.

GamesBeat: If you look around the industry, there are lots more indie game companies that might have just a few people. What legal issues do you think are relevant to them?

Offner: It all depends on the objective of the game company. If the objective is to make their games and release them and sell fun, they may not have that many legal issues as long as they’re up on their basic housekeeping. If their goal is to go out and raise a bunch of money, making sure their corporate docs are in order and their employees and founders have contributed the IP properly into the company, that there are proper vesting schedules relative to the stock, those are the kinds of issues related to raising external capital.

If you have a product or a game or a service that’s becoming incredibly popular, or if you think it’s going to become some wild hit, you’d better plan in advance. You’d better make sure your privacy policy and TOS and e-commerce plan are well worked-through. You’re not scrambling at the last minute, after the fact, to deal with a COPPA issue or something like that.

If you look at the pathway of a company like Oculus, it started as a Kickstarter company. Then it became a company that was raising real capital to bring a consumer product to market. It went through that typical cycle, if that makes any sense. First it was, let’s get our internal house in order. Then it was getting the external house in order to raise money. Then it was all the support to bring a hardware and software platform to the market that also has content around it. We needed to make sure we were buttoned up on privacy and e-commerce. Keeping all that together made it relatively simple for Oculus to be sold to Facebook.

GamesBeat: I’m fascinated by this whole space around the kind of deals that are being made now. I never would have thought Mojang could have sold to Microsoft for $2.5 billion. What had to happen in order to make that take place is something I’m very interested in.

Offner: What do you think is driving those valuations?

GamesBeat: There’s some of that transmedia belief. Something like Star Wars is valuable across all kinds of media, and a lot of these game properties are potentially the same way right now, especially with mobile games. And we have these globally competitive platforms at war with each other. They’re picking up as many pawns as they can, so you get things like Google and Amazon fighting over Twitch, or Microsoft keeping Minecraft out of the hands of anybody else.

Offner: This is why I said I don’t know if we’re in a bubble or not. I feel like we’re in a place in the interactive industry where there’s a lot of people trying to grab land as fast as possible. You can measure land in lots of different ways, but often it’s measured in eyeballs, in the popularity of a property. I don’t think they bought Minecraft necessarily for transmedia. They bought Minecraft because they know it doesn’t matter whether it’s owned by Microsoft or the guys who made it. People are still going to be playing Minecraft, and the guys who made it and work on it are still going to be working on it. Microsoft has bought this incredible global community. That has value for their games and media businesses. I think that’s what drove the acquisition.

What drove the acquisition for Oculus was the belief that this would be the next platform, a platform as powerful as any computing platform out there. Not just for interactive entertainment, but for social and medical and education and industrial. People are trying to buy communities and audiences. They’re trying to buy properties that provide those communities and audiences. In some cases they’re trying to buy the underlying technologies, the actual piping.

That’s what I see right now, and that’s why I hesitated when you asked me. I don’t know. We’re in an interesting time. We see the deals like the one you describe and we never would have imagined them 10 years ago.

GamesBeat: Andy Grove described it as a war for the eyeballs, now that you remind me. The only worry that creates is, what happens when you have the eyeballs valued regardless of the revenue they can actually create? That describes the whole dot-com crash. Everyone was jockeying for eyeballs in the late ‘90s and didn’t care about revenues. Today an awful lot of money is being made by these companies that are getting acquired at such high prices. But if it ever gets to the point where they only care about eyeballs, that gets a little scary.

Offner: When you hear that, let me know, and I’ll try to liquidate my whole angel portfolio as fast as possible.

GamesBeat: But then again, if you follow that logic, I probably would have told you not to go to Oculus.

Offner: You’re right, and Oculus was one of the best experiences of my life. Not everything is logical, as you know.