Olina, Max and I were going to start a strategic partnership to pursue investing. After several meetings and email communications, we decided to delay this effort to a later time since our current interests were not aligned in the same direction. I put one of the meeting minutes (which was emailed to Olina and Max around March 2006) here for my future reference.
Meeting Minutes (draft)
Re: To form a new company to pursue investments
Attendants: Xiaohong, Max, and Chris
3/23/2006 at Escape, Plano, Texas
Prepared by Chris Rao
Xiaohong, Max and Chris met for lunch at Shabu Shabu (from 11:45 a.m. to 1 p.m.). After lunch, we moved to Escape (from 1 p.m. to 3:45 p.m.) to continue our discussions about forming a new investment company. We have generally outlined our company structure, long-term goals, and a preliminary work plan. We determine to pursue this dream of beating the market return by 3% to 4% and ultimately to have an ETF (exchange-traded-fund) listed. Below is a summary of the items we have discussed and determined.
1. Company Name --- Maxshares Capital LLC and/or Maxshares Capital Partners LP
In order to determine our company name, we had a long discussion. First we have determined that our company’s current goals are divided into two steps. In the first step, we strive to reach a numerical target of beating the market return (S&P 500 or SPY) by 3% to 4%. In the second step, we will work toward listing at least one ETF based on our work product. We have recognized that it may take a long time for us to reach these goals. However, we have committed to achieve our goals. Our current expectation is for us to reach our goals in three to five years.
We have considered several names. Max proposed names such as Maxmin Investments, PRS Investments. Xiaohong proposed several alternatives for these names. Chris proposed Maxshares Capital as our company name, following the steps of successful ETF sponsors such as iShares and Powershares. We have agreed to adopt the Maxshares name.
Chris will be responsible for filing the registration of the LP. Initial registration fees of $750 for LP will be shared equally. An accountant is needed for reporting taxes.
Before filing the LP or LLC, Xiaohong will consult with her friends about the right or optimal structure for our joint venture.
2. General Partners.
We agree that all three of us will become general partners. No limited partners are allowed for now. The general partners will contribute a total of $100,000 as initial seed capital.
3. Limited Partners.
We may accept limited partners at a later stage of the company development. If we agree later to admit limited partners, the minimum entry capital should be at least twice of the general partners contributions. However, limited partners can not join the ownership of the company.
4. Partnership unit structure.
We agree that each general partner will have approximately the same units: Max 34%, Xiaohong 33%, and Chris 33%. Initial capital contribution can be in the same percentage.
5. Limited Partnership Agreements.
Since we do not admit any limited partners at this stage of development. This task will be developed at a later time if necessary.
6. Portfolio Management Procedures.
(1) Max each week will develop a list of 10 stock candidates based on his most updated model result and his personal evaluation.
(2) Xiaohong and Chris will independently (or together?) evaluate this list of stock candidates every week. The final product is to rank each stock with some quantitative values range from 1 to 10 (for 1 as the worst while 10 as the best).
(3) Xiaohong and Chris will jointly develop the final buy or sell recommendations based on their independent recommendations. At the same time, written evaluation criteria will be developed over time to solidify and improve the evaluation standards and repeatability.
(4) Chris will make the actual buy or sell executions based on the results from the above studies. All buy or sell executions can be monitored and critiqued at regular bases.
7. Portfolio Management Guidelines.
(1) A portfolio of 30 stocks should be maintained at all time after the initial installation period. When an excellent candidate is better than any one in the current portfolio, a replacement should happen. In this way, the overall portfolio quality would be gradually improved over time.
(2) Full investment should be maintained at all time if possible. This is consistent with our long-term goal of listing our portfolio as an ETF.
(3) If two general partners can convince the third one for a buy/sell, then the buy/sell should happen.
(4) No individual stock should have more than two-times the average weight. When that happens, 50% of the position in that stock should be sold.
(5) When bad news happens to a specific stock, sell first think later. These criteria for bad news will be gradually developed as written forms.
8. Potential conflicts (I can perceive now)
This was not part of the meeting discussion. However, I consider them outstanding questions we have to address properly before starting our joint venture.
(1) Portfolio management conflict. Since each of us has sets of different perspectives in evaluating company’s value, we may have some situations we could not reach an agreement on which company to buy or sell. In this situation, the conflicts may rise. So we have to be very clear on how we could avoid this problem in our testing period and in future operations.
(2) Intellectual properties may also be a problem in the future. Since what Max has developed over the last several years is more or less a black box to the other partners while any written forms of management procedures and management guidelines will be open to all three partners. So we may need to properly address this question very carefully so that later confusion can be avoided.
(3) Clear divisions of jobs among the three partners should also be addressed at earlier time. Now we have strong interests in developing a working product together. However, over time, this togetherness may have to be separated in the near future in order for each of us can leverage his/her strength to the fullest potentials. So I think we have to have some clear directions at the present for each of us to take when the development of the ETF product is closer to its finish line.
(4) Family influence can also become a potential conflict. Each partner has a significant other to consider in order making a long-lasting commitment to this joint venture. It is appropriate for us to address this problem now in order to avoid future confusion.
(5) Confidentiality and nondisclosure issues can also rise in the future. So I think we should consider clearing this out of our ways before we start our joint venture.
(6) Biding period. How long is our joint venture going to last? We have some ideas. But we do not have a definite answer to this question. We should have one, in my opinion.
(7) Regular meeting time. We may form a joint venture; we will not have a common working place for an extended period of time into the future. How do we make sure we have all our communications problems resolved properly and timely? This should be addressed clearly.
9. Comments and Questions.
I summarized our meeting minutes and raised some potential questions. Now I ask you two have some comments and raise your questions so that we can proceed to the next level for this joint venture.
