What is the best way to setup a partnership with a financial backer to trade at prop/firm that requires a deposit? The deal is going to be that it is his money and I trade it, then we split it. Does anyone have any experience with this type of deal? Thanks.
Best way to set up partnership with a backer
- Thread starter beer money
- Start date
I initially sent my standard Backer-Trader terms to the OP via PM, but now I realize this is one of those rare instances where I can freely post some valuable information to ET without any risk of it ending up costing me anything. (As opposed to posting trading strategy info and the like- which can take $$$ directly out of the poster's pocket as the strategy becomes diluted & overcrowded).
Anyways, here's my file. I strongly believe that any backer who neglects to put in some sort of 'golden handcuff' clause will regret such a decision later.
_______________________
Trader backing terms:
*Trader gets paid 55%, backer 45%.
*Trader gets 20% of all net monthly P/L, to be paid on or before the second Friday of the following month.
* If underwater, trader still gets 5% of net monthly P/L, or 20% of new high-watermark profit- whichever figure is higher. To be paid on or before the second Friday of the following month.
*At year end, trader will be paid the total of 35% of net yearly profit, minus any monthly distributions already collected.
*The remaining 20% of yearly net profits will be held as 'golden handcuffs' by backer, to be paid as follows:
10% by Christmas two years forward
10% by Christmas three years forward.
These funds will not earn interest. However, in order to keep the calculations simpler, the trader will benefit from 55% of the interest on the balance of his buying power (calculated by Echo every day and paid out monthly), as if it were his own positive P/L.
__________
For example, the trader produces the following net results (net after commissions, SEC fees, and borrowing interest on long positions held overnight):
Jan 2006: -$2,000 ---> Monthly Trader payment: $0
Feb 2006: -$2,000 ---> Monthly Trader payment: $0
Mar 2006: +$1,000 ---> Monthly Trader payment: $50 (5%, as trader is underwater)
Apr 2006: +$3,000 ---> Monthly Trader payment: $150
May 2006: +$3,000 ---> Monthly Trader payment: $600 (20%-No longer underwater)
Jun 2006: + $3,000 ---> Monthly Trader payment: $600
Jul 2006: +$8,000 ---> Monthly Trader payment: $1,600
Aug 2006: +$30,000 ---> Monthly Trader payment: $6,000
Sep 2006: +$20,000 ---> Monthly Trader payment: $4,000
Oct 2006: +$50,000 ---> Monthly Trader payment: $10,000
Nov 2006: -$20,000 ---> Monthly Trader payment: $0
Dec 2006: +$60,000 ---> Monthly Trader payment: $8,000 (previous month's loss deducted)
At the end of 2006, the trader's total net profit is: $154,000. On the second Friday of Jan 2007, he receives 35% of yearly net minus all monthly payments already collected.
So in this case ($53,900= 35% of yearly net) - ($31,000= Funds already paid out in monthly distributions) = $22,900 year end payment.
$53,900 is therefore also his total annual trading income.
Producing these results also entitles him to an additional 20% of annual net, deferred as golden handcuffs:
$15,400 to be paid before Christmas 2008.
AND
$15,400 to be paid before Christmas 2009.
Forfeiture of golden handcuffs:
If the trader ends this backing arrangement or begins trading his own money or the money of another backer, he forfeits all golden handcuff funds due.
If the backer terminates the arrangement, he must immediately pay all golden handcuff money due, minus any underwater amount the trader currently shows.
If the trader does exceptionally well, these terms and conditions may be altered in the trader's favor.
Anyways, here's my file. I strongly believe that any backer who neglects to put in some sort of 'golden handcuff' clause will regret such a decision later.
_______________________
Trader backing terms:
*Trader gets paid 55%, backer 45%.
*Trader gets 20% of all net monthly P/L, to be paid on or before the second Friday of the following month.
* If underwater, trader still gets 5% of net monthly P/L, or 20% of new high-watermark profit- whichever figure is higher. To be paid on or before the second Friday of the following month.
*At year end, trader will be paid the total of 35% of net yearly profit, minus any monthly distributions already collected.
*The remaining 20% of yearly net profits will be held as 'golden handcuffs' by backer, to be paid as follows:
10% by Christmas two years forward
10% by Christmas three years forward.
These funds will not earn interest. However, in order to keep the calculations simpler, the trader will benefit from 55% of the interest on the balance of his buying power (calculated by Echo every day and paid out monthly), as if it were his own positive P/L.
__________
For example, the trader produces the following net results (net after commissions, SEC fees, and borrowing interest on long positions held overnight):
Jan 2006: -$2,000 ---> Monthly Trader payment: $0
Feb 2006: -$2,000 ---> Monthly Trader payment: $0
Mar 2006: +$1,000 ---> Monthly Trader payment: $50 (5%, as trader is underwater)
Apr 2006: +$3,000 ---> Monthly Trader payment: $150
May 2006: +$3,000 ---> Monthly Trader payment: $600 (20%-No longer underwater)
Jun 2006: + $3,000 ---> Monthly Trader payment: $600
Jul 2006: +$8,000 ---> Monthly Trader payment: $1,600
Aug 2006: +$30,000 ---> Monthly Trader payment: $6,000
Sep 2006: +$20,000 ---> Monthly Trader payment: $4,000
Oct 2006: +$50,000 ---> Monthly Trader payment: $10,000
Nov 2006: -$20,000 ---> Monthly Trader payment: $0
Dec 2006: +$60,000 ---> Monthly Trader payment: $8,000 (previous month's loss deducted)
At the end of 2006, the trader's total net profit is: $154,000. On the second Friday of Jan 2007, he receives 35% of yearly net minus all monthly payments already collected.
So in this case ($53,900= 35% of yearly net) - ($31,000= Funds already paid out in monthly distributions) = $22,900 year end payment.
$53,900 is therefore also his total annual trading income.
Producing these results also entitles him to an additional 20% of annual net, deferred as golden handcuffs:
$15,400 to be paid before Christmas 2008.
AND
$15,400 to be paid before Christmas 2009.
Forfeiture of golden handcuffs:
If the trader ends this backing arrangement or begins trading his own money or the money of another backer, he forfeits all golden handcuff funds due.
If the backer terminates the arrangement, he must immediately pay all golden handcuff money due, minus any underwater amount the trader currently shows.
If the trader does exceptionally well, these terms and conditions may be altered in the trader's favor.
Wow.
That info is probably worth a Master's Degree in Negotiation of Trading Agreements.
For anyone who even thinks of getting-in on that side of the business, I'd say this thread is one for the archives.
Good trading
Thanks RM. You just convinced me to never go prop. 
If you have $0.5mm AUM or greater and your trading it across a diversified portfolio of currencies, financials, bonds and grains it all starts to make sense ...Quote from ProfitTakgFool:
Thanks RM. You just convinced me to never go prop.
Quote from ProfitTakgFool:
Thanks RM. You just convinced me to never go prop.
Well, you could always just put up your own dough (taking on all of the risk yourself), and not have to worry about any sort of profit-sharing split with a backer, since there wouldn't be one.
Alternatively, maybe you could find a backer with simpler terms who is less protective of his investment than I am.
Backing rookie traders is a notorious money pit. 90% fail, and 5% make petty pocket change.
Perhaps 5% become successful traders, and most of them quickly realize they're better off ditching the backer and trading their own money. That's why, in order to give myself a fighting chance of turning a profit on such a deal, I implement partially deferred payouts (golden handcuffs) and insist they trade through a firm where I have a deal for very competitive commission rates- with a slice of the trader's commission revenue being kicked back to me, the backer.
Why even back anyone Rm ? If they don't even have enough discipline to save 10k for a prop deposit then do you really think they are disciplined enough to trade your money ?
Thanx, hermitage!
Volente: I wouldn't be interested in backing the vast majority of traders. Certain special exceptions could arise though, like if the trader is a ridiculously conservative, fear-filled grinder with very consistent but very small net monthly gains. This could be someone with a psychological mental block that prevents him from earning any more than the amount needed to cover his monthly living expenses. Another possible deal I'd consider, would be to back a very young wannabe trader who doesn't yet have $10K, but blows my little pattern-recognition puzzles right out of the water, displaying an incredibly rare level of natural aptitude & potential.
For the most part though, you're right: Backing other traders is usually a lousy idea.