Investment Club Operating and Service Agreement

What a good one includes

• A clear definition of initial and ongoing capital contributions, including minimum deposit amounts, payment schedules, and penalties for late contributions.
• A detailed voting mechanism that specifies how investment decisions are proposed, debated, and approved, whether by a simple majority, supermajority, or weighted by capital share.
• An explicit exit strategy detailing how a member can withdraw from the club, how their share of the portfolio is valued, and the timeline for paying out their equity.
• Clearly assigned administrative roles, such as treasurer, secretary, and president, outlining their specific service duties, record-keeping responsibilities, and tax filing obligations.
• A formal process for admitting new members, including nomination rules, voting requirements for acceptance, and buy-in calculation methods.
• A step-by-step winding-down clause that dictates how the portfolio will be liquidated and assets distributed if the club decides to dissolve.

Common mistakes to avoid

• Neglecting to define a clear, math-based formula for member exits, which leads to bitter disputes over asset valuation when someone wants to cash out during a market downturn.
• Using vague voting rules that don't specify whether votes are counted per person or weighted by the amount of capital each member has contributed.
• Failing to specify how the club will handle tax reporting, such as issuing Schedule K-1s, which can result in unexpected IRS penalties or filing delays for members.
• Omitting a clear penalty or dilution clause for members who stop making their mandatory monthly capital contributions.

Frequently asked questions