Now that summer is underway, a lot of people are asking me about the proper “rules” for staking with the Borgata Summer Poker Open coming up (and that other little tournament going on in Vegas). I just wanted to post a blog outlining the ins and outs of staking deals to help people understand how each type of deal works.
The traditional type of staking deal is known as a “makeup deal”. There is an agreement made between the player (“horse”) and investor (“backer”) that covers three basic topics:
- What type of tournaments are to be played under the stake
- What percentage of profits each side will receive if and when profit is realized
- When profit sharing will take place (i.e. any time there is profit, monthly, bi-weekly, etc.)
The most common type of these deals is a “50/50 with makeup” deal. The horse will play all agreed upon tournaments with the backer’s money. Any losses incurred are added to the “makeup” number until there are winnings from a tournament.
If a horse goes on a $200k downswing before finishing winning $193k, the entirety of that $193k will be returned to the backer to cover the makeup figure. If he wins $300k in that event instead, $200k goes back to the backer to cover makeup while the other $100k is distributed based on the percentages agreed to in the profit-sharing agreement.
It should be specified that makeup IS NOT debt. The horse will not owe that amount of money to the backer if the deal is terminated by the backer. He/she is, however, obliged to continue playing the agreed upon tournaments for the backer as long as the backer wants to continue putting up the buy-in money. The only way the horse can owe the amount of the makeup to the backer is if they refuse to continue playing the agreed upon tournaments under the staking deal.
While this system works and is often a great way for a risk-averse yet talented player to play in tournaments that they may not be properly bankrolled for, it also has its drawbacks. Situations often come up where a player has such a large makeup number that they find it difficult to motivate himself/herself to continue playing, especially in small buy-in events where first place falls short of clearing makeup. I certainly know from experience since the $193k score going straight to the backer was not a hypothetical illustration; It’s something that actually happened to me in 2012 when I was still backed.
The system also puts backers in a tough spot where they need to weigh the future potential earnings of a horse against their makeup figure while trying not to fall victim to the sunk cost fallacy. Many poker pros overextended themselves in recent years and went broke trying to recoup losses by continuing to back horses who had a sizeable makeup figure with them.
In recent years there have been less and less people willing to take on the long-term commitment of fully staking a player, especially in high stakes tournaments. As a result, it is more common now for people to just sell shares of themselves in events they want to play but that they’re not properly bankrolled for.
Instead of having a deal where the backer and horse have an agreement about who gets what percentage of profits, the player determines what markup they’re willing to sell shares their action at. For example, If you think your ROI is 30% in an event, you can sell your action at a 20% markup (aka 1.2:1) and still make it a profitable proposition for the buyer. I won’t get too deep into the “markup debate” but I will say that there is currently a tendency for people to sell at markups that are too high, whether it’s due to intentional price gouging or because they tend to overestimate their edge in a tournament. Right now it’s definitely a seller’s market, and many people are willing to take advantage of that fact.
All in all, I still think this tends to be a better system for both sides of the agreement. Backers are not incentivized to keep investing in a player who is break-even or a slight winner. Horses are able to pick and choose what events they’d like to keep what percentage of their action/winnings in. You may want to sell half of your action when you take a shot in a WPT Borgata main event, but do you also want to give up half of your action in the $560 opening event or the $120 nightly tournament? Probably not!
No discussion of poker staking would be complete without mentioning tax implications. Most casinos require prize money to be distributed to the player who won it regardless of what their staking deals may be. It is the player’s responsibility not only to pay the money to the backer after receiving it from the casino, but to fill out IRS paperwork that declares how much of your winnings were distributed and to whom.
If you fully trust someone you can wait until the end of the year to figure out the net profit they received from your winnings and issue the paperwork then, but it’s always safer to require someone’s full name, legal address, and Social Security Number before paying out a backer or buyer’s share of winnings to avoid issues.