5 Important Things To Consider When Forming An Investment Club

Most clubs are born of casual conversation in a social settings, where friends, inspired by various things, but mostly the emotion around being rich discuss and agree to pool funds towards an investment goal.

It’s however not advisable to start making contributions on the spot, an investment club is a long term commitment, and it requires a bit more structure than casual conversation can give. In this post, we’ll look at 5 important factors to consider when forming an investment club, then in the next post we’ll discuss the various legal structures a club can take.

1. Purpose: It’s very important to have clarity of vision at the beginning, this keeps the club focused on what it intends to achieve, and defines the club’s success. The founders ought to ask themselves; “how will we look when we’re successful?”. This can be as ambitious as they want it to be, but of course within reason. A club can for example purpose that each member will have their own home in 5 years time; or to build a block of flats in 3 years; or to have investments in the stock market worth Kshs 5 million in 10 years. It’s important to have a time within which the club intends to achieve this objective. Taking a step further, this objective should then be broken down to annual and monthly goals, which then informsthe contributions members need to make on a monthly basis. It’s not enough to just contribute funds, clarity of purpose or vision keeps the club going when the initial excitement and emotion wears off.
2. Membership: A club should have at least 7 and at most 20 members for it to be productive. The founders need to define clearly the qualifications for membership and admission process.Most clubs require that a new member be introduced by an existing member, after which the rest interview him to determine whether he fits in with the rest of the group. As much as possible, members should share values, investment objectives and vision, otherwise the club will not thrive.
3. Leadership: Most clubs adopt an amorphous structure, because the members are friends and for that reason shy from defining leadership. However, like all organisations, a club should have a well defined leadership structure. There should be people who are responsible for the direction of the club and implementation of agreed upon initiatives. It’s important to have a Chairperson, whose key role is to call for meetings, set agenda and guide the discussions of the meetings; a treasurer, who keeps a record of the club’s finances and tracks member contributions. The treasurer must be diligent to give reports on a monthly basis, so the club members can assess how well they’re doing in achieving their purpose. Finally, it’s important to have a secretary, who keeps a record of all deliberations and decisions made by the club. Most clubs are legal entities and for that reason are required to keep a record of all their meetings’ minutes. In addition to this, it’s very important to keep a record of important deliberations and discussions for future reference.
4. Decision Making Structure: Every club should have a well defined and documented decision making structure. Most clubs adopt a “one member, one vote” structure for all the major decisions, which is considered fair, compared to a structure where voting is as per shares held. The former structure appreciates that a member’s intellect and ideas are actually more valuable than monetary contributions to the club. In addition to this, members should define what constitutes quorum for decision making at meetings, and to what extent an absent member can change decisions made by the club.
5. Role Definition: Beyond the above leadership structure, each club member should have a role to play, which is in line with his individual skills and competencies. Most clubs will go out of their way to recruit members with strengths that are useful to the attainment of the club’s purpose.  At the very least, each club should have at least one member with basic accounting and finance skills, investment skills and where possible legal skills.

With the above in place, then the club members can start to think about the legal structure they should adopt, that will be the content of the next post.