In Focus

Be Prepared, Partner

Today's Chick's Eye View discusses step six of Starting An Investment Club, Forming a Partnership. Why would you need to form a partnership to start an investment club with a bunch of friends? After all, you are ten women, working toward the same investment goal. Why would you need to take the time to fill out a partnership agreement? Come on, a handshake should do, right? Friendship is more important than cash, isn't it? Shouldn't your word be good enough?

Ummmmm... no.

Sometimes, in spite of all your good intentions, things go wrong. Way wrong! What are you going to do if Georgie, your least favorite club member, says she needs all of her cash out of the club because she is eloping with an escaped convict? Like tomorrow. Are you prepared? On top of that, she claims she is due some INTEREST on the money!! The problem is, your club hasn't made any money yet. Matter of fact, in the last four months, the market has been DOWN! Your club doesn't even have enough money to pay back her original investment. What recourse do you have? (And remember, he's an escaped convict.)

Every club should have a partnership agreement signed and in hand before doing any business or collecting any money. Just ask the Chicks. We learned the hard way.

Here's what happened.

We decided to hold off signing a formal partnership. We figured we'd just see how it went for a couple of months. We had copies of sample partnership agreements, operating procedures and by-laws in hand, but no idea what they meant, nor much desire to try to understand them. That could wait. we wanted to get on with the exciting part -- investing in the stock market.

The next few meetings came and went with no agreement in place and little talk of what to do about it. We contributed our monthly dues and trusted that all was well. We were friends, what could possibly happen? Who would want to leave the club? Maybe in five years or something, but not in the near future. We were so eager to purchase some stock, the partnership agreement could be dealt with later. Details details.

It wasn't even five months before trouble started. Someone wanted out, and someone else kept missing meetings. Now what were we going to do? (Don't even think about getting any more gossip than that!) We realized we needed some rules. We needed rules pertaining to the following:

• What do you do when a person wants to leave the club? Does the person leaving take out all they've invested in the club? Plus interest? Minus interest? Lesser of the two? Should they have to pay transaction fees if you have to sell a stock in order to buy them out?
• What is the procedure for a formal exit from the club? How much notice does someone have to give the club that they want to leave?
• What do you do if a club member fails to show up for a certain percentage of meetings? What is that percentage? What if a club member fails to participate in any club message board discussions?
• What are the responsibilities of a club member? How do you divvy up the work? Would there be penalties for slacking off?
• What if a member fails to pay their dues? Is there a fine? If so, what is it?
• How would a new member be allowed into the club?
• How often is the club required to meet? (The Teeter-Totter of Timing)
• Where will the meetings be? (Format Schmormat)
• Who are the officers?
• Who will file the tax return?
• How much are the monthly dues?
• What is the philosophy of the club? Is it to invest in High Risk Stocks? In Low-Risk Stocks? Is there a method you will use for your criteria? Are you going to research any and every "hot tip" or do you stick to a philosophy?
• At what point do you sell a stock? Do you have Sell Criteria?

I'll stop here.

Every club I've talked to loses a member in the first few months because things are not clear from the get-go. Things need to be understood and put down on paper so there are no surprises when Georgie decides she wants back in the club when her groom is a no-show. Be prepared, (and tell her you'll think about it if she gives you the wedding gift back). The Chicks weren't prepared and we lost some money. Please learn from our mistake and get a Partnership Agreement in hand. (Take a look at Step 6 of Steps to Starting An Investment Club.) I want to save you some confusion and disappointment. (Now I never buy wedding gifts until the actual day. Ya just never know.)

Articles focusing on the Steps To Starting An Investment Club

Step 1: Begin with the Right People

Step 2: Establish Your Club Size

Step 3: How Much Per Month?

Step 4: Format Schmormat

Step 5: The Teeter Totter of Timing

Step 6: Be Prepared, Partner

Step 7: To Spank or Not to Spank

Step 8: About Our Message Boards