Team Trading Contracts Part 3: What Should Go Into Your Business Contract?
In the first two installments in this short series on business contracts and binary options trading, I talked about types of trading teams you can form as well as the importance of having a business contract in situations where you are going to be sharing risks and profits with others. These situations apply if you are sharing trading accounts with team members.
This advice is applicable as well if you are a solitary investor who is opening up a business where you trade for others in return for a percentage. Often these joint ventures are informally arranged online without sufficient forethought. It is important though that you have a written business contract in place any time your money and somebody else’s are going to be mixed together, or any time you may find yourself responsible for somebody else’s gains or losses.
What should go into a business contract associated with trading? The details will vary depending on your situation and the decisions you make at the outset. The contract should be written in simple, clear terms. At a minimum, you will want to make sure you have covered the following.
1. Who is involved.
Get the correct legal names of everybody involved in the contract and make sure that everybody is identified correctly in the document. You will need to get everybody’s signatures and distribute copies.
2. Identify who is responsible for risks and debts.
Let’s say you are trading with a team, and you share an account, and one trader places a trade which causes the account to lose money. How is that loss tallied? Is it that trader’s sole responsibility, or does everybody on the team lose that money? What if debts are incurred in association with the account? Are team members allowed to borrow money to finance the trading account? If so, whose responsibility is the debt? Is the debt the property of the person who took out the loan, or does it belong to everyone on the team? Learn how to recover big losses here.
3. Determine how winnings will be distributed.
How is the money in the account divided up? Do all team members have an equal stake, or do some members have higher or lower percentages based on their responsibilities or level of involvement? If you are investing for clients, what percentage will you receive in exchange for your services?
4. Who can deposit and withdraw, and when, and under what circumstances?
Every time a change is made in a trading account, it is something for which somebody must be responsible. You should have rules if you are sharing an account as to who can add or withdraw funds, why, and whether all team members need to okay every transaction. You may also want to specify whether the money in the account is locked there for a certain time period or until a certain profit level is reached.
5. How are trading decisions reached?
Are traders at their discretion, or do they need to place trades according to very specific rules? What happens if traders go outside of those rules and place trades which are not acceptable based on those rules? How will your team manage money?
6. A termination clause and a clause for dispute resolution.
Always assume the worst is going to happen, and have a plan in place for when it does. Hopefully it never will, but under what circumstances can you or other team members exit the relationship? Say you are sharing an account with two other team members and you each own 30% of the funds. If you want to quit, is one of your teammates obligated to buy you out? Can any team member simply cash out and exit at any time? Will you have to dissolve the account and distribute the funds and go your separate ways? What if you have a disagreement as to what happens next? Will you go to court, or agree to use legal mediation services instead?
7. Choose a country and state for the contract.
If you are trading with others, you may have teammates or clients located anywhere on the globe. Different states and countries have different laws. It is wise to choose one and only one state and country to govern the contract. You will need to choose the same location for mediation or other forms of dispute resolution, so think carefully.
8. How and when will you get paid?
If you are offering services to clients, how and when will you be compensated for your efforts? If you are trading with a team, will regular withdrawals from the account be permitted? Will there be milestones in terms of time or money where team members can decide to cash out in part or in full and walk away?
As you can see, there is a lot you have to think about when other people get involved directly with your trading. As a result, it is wise to think long and hard before you decide to take on client accounts in return for a percentage, or share an account with team members in a trading partnership. Unless you feel 100% comfortable with the contract you have drafted up and are dealing with other people who share your mindset, it is wise to press on and wait for another opportunity.