Looking to start an investment group without feeling like you’re herding cats? You’ve come to the right place.
You’ve gathered your most wealth-minded friends and family members, and together, you’re ready to pursue the group investment opportunity of your dreams. But before you pull the trigger on your investment, questions start popping up:
Who’s in charge of coordinating the payments? How will we distribute earnings? What happens if one of the group wants to sell, but everyone else wants to hold onto the investment?
Establishing solid investment group rules upfront will help you answer these questions and more: Before they become arguments.
Let’s examine the top investment group rules every group needs to invest together successfully.
Benefits of Investment Group Rules
Before we provide our recommendations for the essential rules your investment group needs, let’s discuss group investment more broadly. First of all, what does it mean to invest as a group? An investment group is a group of people who pool funds to invest together.
Though many of us think investment groups are elite clubs only available to the incredibly wealthy, anyone can form an investment group as long as they have a community of like-minded people interested in investing together.
When you invest as a group, you can enjoy benefits like lower risk and a larger pool of investable capital. More capital and less risk open the door to assets you might not be able to afford on your own, allowing you to diversify your portfolio. Additionally, you can leverage the investment experience of all your investment group members to make better decisions with your capital.
Investing as a group can feel stressful, but when you set up rules and expectations at the outset, it can be a fun way to build wealth and relationships at the same time! Setting up the right rules can help you avoid conflict and create a partnership where all group members feel involved, heard, and valued in the group.
Organizational Rules
Organizational rules are the first type of rules you need to set up for your group. These rules will dictate how your group is structured, how it operates, and more. Let’s take a look at a few organizational rules your group will need to invest together successfully.
The first rule you need to establish relates to your management structure. To start your investment group, you will need to file an LLC. This business entity gives you two choices related to management structure:
- Member-Managed LLC: In this structure, all members of your group will participate in managing the business entity behind your investment group.
- Manager-Managed LLC: If you choose this structure, your group will select one or more “managers” for the business. These “managers” will have more responsibility and decision-making power than the other members of the group.
You will also want to set rules around your ownership structure. Your ownership structure will determine each member’s equity in your business. Many investment groups tie this equity directly to member contributions, but you can also choose to set member equity manually.
Lastly, you need to establish communication rules. Without proper communication practices, your investment group is at risk of conflict and chaos. You will want to set up rules surrounding:
- What communication channel is used?
- How and where will the group meet?
- What are the communication expectations for each member?
One rule we absolutely recommend is no sidebars. This rule means that everyone is kept in the loop at all times and no group members feel left out of important decisions or conversations.
Voting Rules
The next type of rule you must establish is voting rules. Your group will need to make decisions to move forward with investment opportunities. Without well-established voting rules, your decision-making process can get messy. Let’s look at some of the voting rules you’ll want to establish.
First, you need to set up a voting structure. Does each member get an equal vote, or are your votes weighted to account for each group member’s equity?
Next, establish voting thresholds. When your group votes on a major transaction or investment decision, what counts as a “pass?” Some groups require a unanimous vote or a super majority, while others accept a simple majority rule.
You will also want to establish the types of decisions that require a vote. Will you have a different threshold requirement for smaller decisions, but require unanimous approval for a larger decision? These rules must be established upfront if you want your investment group to operate smoothly.
Rules about Payouts and Distributions
Your third category of investment group rules will relate to payouts and distributions. In other words—how will members of your group receive income from your investments? Alternately, in less happy times, how will the group handle losses?
You’ll need rules surrounding the distribution of profits to answer these questions. Do you want to distribute profits annually or more frequently? Perhaps you don’t necessarily want to distribute annually—maybe you want to vote each year regarding distributions for the future simply. These are all decisions that need to be made in advance and set up with rules ahead of time.
These rules will most likely vary depending on the type of investment you pursue. Suppose you invest in a rental property, for example. In that case, you will need to establish which group members are responsible for collecting rent payments and decide how often those payments are distributed among group members.
Lastly, set up rules related to future investment opportunities. Do you want to set aside a portion of the group’s profits for future investments? If so, how is the equity divided for those future investments?
Rules for Adding or Removing Members
Next, you will need to set up rules regarding adding or removing members from your investment group.
Is someone allowed to join partway through an opportunity? If so, what rules are required for buying in late in the game?
You’ll also need rules dictating what happens if a group member wants to leave the opportunity early. In the event of a voluntary exit, is there a penalty? What is the process for exiting the investment group?
Additionally, what would require an involuntary exit? Decide what actions or issues would result in a member getting removed from the group. Make it clear what rules each group member must adhere to avoid being removed.
Lastly, you’ll need rules for dissolution practices. How do you decide when to dissolve the business altogether? Some common examples include an annual vote or at the conclusion of a single investment, but your group may have different rules surrounding dissolution practices altogether.
Record-Keeping Rules
Lastly, you’ll need some rules about record-keeping to keep your investment group compliant, organized, and running smoothly. Here is a checklist of some of the records and paperwork you’ll need to keep track of for your investment group:
- LLC Filing Paperwork
- Registered Agent (must be located in the state in which you've filed your LLC)
- LLC Reporting Obligations (includes regular reporting of information like your EIN, purpose for doing business, address, and more)
- Managing Fee Deadlines (ensuring fees related to your business entity are paid on time)
- Tax Forms
If you use Tribevest to manage your investment group, you can list us as your Registered Agent. We can then automate report filing for you, allowing you to automate a number of the tasks related to record-keeping for your group.
However, you should still establish a founder or leader responsible for keeping track of the record-keeping processes for your investment group.
Maintaining Your Investment Group Rules with Ease
Investing as a group is an excellent way to build wealth and spread risk while learning about new investment opportunities with friends and family. You can set yourself up for success by starting out organized and maintaining open lines of communication throughout your investment opportunity.
Establishing clear rules like the ones listed in this post is a great starting point for your group’s success, but rules alone aren’t enough to allow you to leverage your investment group to its fullest potential.
Implement an alignment tool like Tribevest to formalize your group structure into an LLC, combine funds, coordinate communication and voting, and more. Get started with Tribevest today to see how easy it is to start and maintain your investment group.
