The most common questions I get from poker followers involve staking deals. Staking is when a person puts up all or part of a buy-in for a player to get into a poker tournament or cash game. In the poker world, staking happens all the time. As common as poker staking is, however, there is little information available about how staking actually works. In this no limit holdem strategy article, I hope to shed some light on poker staking deals and what types of details you need to consider, both as a player and a poker staker.
Understanding Poker Staking
A staking deal is usually stated as a percentage generally referring to what the player is playing for (e.g. “a 20% staking deal”) or two numbers adding up to 100% (e.g. “a 60/40 deal”) with the first number generally referring to the player’s share. Recently it has become common to express short-term staking deals as decimal numbers (e.g. “selling at 1.1”) which indicate the percentage that a player is selling a 1% piece of the tournament for. Sometimes you will run across situations where a player is selling pieces at no mark-up. This is referred to as selling at face value, or “at face” for short.
We can divide poker staking deals into two types: those with makeup and those without. A staking deal without makeup is usually a short-term deal for a single tournament where a poker player will generally sell himself for a mark-up. A staker will put up all or part of a tournament buyin for a share of winnings.
A long-term deal usually involves what is known as makeup. Makeup refers to the running total of all the buy-ins that the staker has put up that haven’t been covered by the players winnings. The makeup total is paid off before any winnings are split. Generally, the player and staker will split the profits anytime the player is in the black. This sounds complex, but can be easily understood with an example.
Example #1 : A Standard 50/50 Staking Deal w/ Makeup
A player finds a staker with deep pockets to front the expense of his tournament buyins. They agree on a 50/50 split with makeup. The player enters four $1000 buyin tournaments and busts out early. His makeup total at this point is $4k.
He has better luck in the fifth tournament, another $1000 buyin event, and min cashes for $2k. The entire $2k cash goes to the backer, however, as his makeup was $5k to start the fifth tournament. After he hands over the win, his makeup total stands at $3k.
Our player cashes heavy in his sixth tournament, cashing for $15k. Of this win, $4k goes straight to the backer to cover the makeup. Now the remaining $11k is split between the player and backer at the 50/50 rate. The player gives the staker $5.5k and keeps $5.5k for himself. After $6,000 in entry fees, the staker got back his $6k and both the staker and player have each made $5.5k profit.
Problems With Makeup
In most short-term deals, makeup exists for the individual tournament even when there isn’t an explicit agreement to carry over makeup from one tournament to the next. It is important when structuring a staking deal to address this issue before you ever start. It’s not uncommon for fights to arise and relationships to dissolve when this isn’t clearly understood by both parties.
Example #2 : A Makeup Misunderstanding
A player gets a friend to put him into the 2012 WSOP Main Event. His friendly staker agrees to put up the full $10k buyin for 60% of the winnings. Our player grinds hard, but ends up busting on day four for a minimum cash of $19,227.
“Better luck next year,” he says grimly to his friend, as he pulls out his calculator, multiplies the win by 60% ($19,227 * .6) and separates $11,536.20 from the win.
“Wait a minute, bud! You owe me another $4k,” says the friendly backer. He pulls out his calculator, subtracts the $10k from the win, and multiplies the remainder by 60%. His formula is a bit different than our players and looks like this : ($19,227 – $10,000) * .6 = $15,536.20.
The two begin arguing, exchange many colorful fighting words, and after one feels ripped off they never talk to each other again.
This example should show how staking arrangements can dissolve with bad feelings fairly easily. In general, I would suggest that in the above example the staker is in the right. A one-off deal generally includes implicit makeup of the entry fee. If the WSOP Main Event were structured such that the min cash were less than the $10k entry fee, it doesn’t make sense for the player to walk away in the black and the staker to walk away suffering a loss.
However, in situations where a player is selling pieces of himself, the general rule is there is no buy-in makeup. For example, suppose a player tweets that he is “selling 40% in the main event at 1.2” and you decide to buy the full 40% chunk for $5,200. He then goes on to min cash for $19,227. You generally won’t get your $5,200 back before he splits the $19,227. You should expect to get $7,690.80 ($19,227 * .4)… not $8,890.80 (your investment + $9,227*.6).
Situations where you trade pieces with another player should generally be treated the same as if you are selling him a piece and he is selling you a piece (i.e. you do not include tournament makeup before calculating your piece). If you swap 10% with a fellow player who is playing the same event as you are, and you bust while he min cashes for exactly the buy-in of the event, you should expect to get 10% of that cash.
Problems Without Makeup
For one-off deals without makeup, it is very easy for a staker to be in a negative EV situation even when staking a winning player. The nature of tournaments is such that the vast majority of entries will result in a loss. Even the top players in the game generally have an in-the-money percentage (ITM) of < 20%. This means that four out of five tournaments for even world-class players will end up as a bust.
Along with the ITM %, you have to be realistic about the player’s average return on investment (ROI %). In a long-term deal with makeup, a player with a positive ROI is going to turn a profit for a staker (not taking into account tax issues, where one tax-year’s losses can’t be written off against another tax-year’s winnings). But in no makeup deals, a staker can get buried in a negative EV situation even if the player is a consistent winner. Let’s spell it out with an example.
Example #3: A Staker’s Bad Deal
You are friends with a world-class player who has been able to sustain an ROI of 30% with an ITM of 20% over a large sample of major tournaments. He asks if you want to make some money with him, and you agree to buy his action in ten different WPT main events at 1.3 for a total of $100,000 in entry fees. Looking up at the chart above, we see that this equates to 76.92% of his action without makeup. It sounds like a fair deal.
After ten events, your world-class friend has cashed in two of them for $65k each. You get your 76.92% back from each of these cashes… for a total of $99,996. Your friend is up a hair over $30k and you are down $4.
In my experience, players and stakers alike generally overestimate the ROI % of the player and underestimate the winnings % that a staker has to take in a no makeup deal to break even. It is easy to understand that staking a losing poker player will always be a negative EV proposition… but if the numbers are wrong, staking a winning player can be just as negative EV.
Tax Problems With Staking Deals
One of the biggest problems that I constantly see in staking deals has to do with when it comes time to pay Uncle Sam. You should always assume the best when you are entering into a staking deal. Assume that you will hit every tournament out of the park and that there will be a lot of gambling winnings that will have to be reported to the IRS. Unless you discuss the tax liability at the start, a successful staking deal can quickly turn into a nightmare.
The right way to handle staking deals from a tax point of view is for the player to have the staker sign a Form 5754 (Statement by Person(s) Receiving Gambling Winnings) for every tournament win which issues a W-2G. Some casinos will allow the player to file the Form 5754 and will then issue W-2Gs to all the stakers individually. Other casinos will only issue W-2Gs to the actual player, and it will then be up to them to get the 5754s in order and get the right reports to the IRS.
When you are dealing with foreign stakers, the tax situation becomes even more of a nightmare. Most foreigners are required to have the casino withhold winnings for tax purposes. This gets messy very quickly if there is not a clear agreement in place and the staker expects you to just pay them their share when you collect it from the cage. Many might remember the case in 2006, when poker champion Jamie Gold allegedly refused to pay his staker the agreed upon split of his $12 million prize in the WSOP championship. I’ve talked with Jamie about this, and I’m convinced that this PR disaster was a result of his staker (which was a resident of Costa Rica) trying to avoid the tax liability for his $6 million share.
I can tell you that in practice, most poker players fall apart to an IRS audit. The majority of staking deals are handshake agreements usually entered into without even a written contract, let alone a Form 5754. This is just the dark truth of poker, and I expect we will continue to see many high-profile players facing problems with taxes.
But if you are entering into a new staking deal, it’s best to have your deal in writing and have the IRS forms signed and ready to go before you start playing.
Trust and Staking
For a staking deal to be successful, it is very important for a staker and player to trust each other. The gambling world is filled with stories where players ripoff stakers. I’ve personally seen players collect money for a tournament that they didn’t play in. I’ve also heard numerous stories of players overselling themselves in an event (e.g. selling 300% of their WSOP Main Event to numerous stakers, and pocketing $20k after they bustout on Day 1). There are also many stories of a staked player refusing to turn over the staker’s winnings after a big score.
Tournaments are easily tracked and most major tournaments publicly report the payouts. It is harder for a staker to get ripped off from a player if that player has to show receipts for tournaments he has entered. Even then, however, a staker has to be careful because it’s still possible for a dishonest player to rip them off. Some tournaments will allow you to unregister for a full refund. In these cases, a player can still be able to provide a receipt for a tournament that they didn’t play in (and pocketed the buyin for). There is a growing trend for hosting casinos to report all of the entrants in their tournaments. The WSOP started doing this a couple of years ago, and I hope its a trend that catches on, as it makes it more difficult for players to ripoff their stakers.
In general, staking deals are almost always for tournaments rather than cash games. The nature of cash games makes it all to easy for the player to pocket winnings. Even in situations where every hand played can be tracked, such as online, a player can still just lose money to a friend at the table. As a rule, you should generally stay away from staking arrangements for cash games unless it is with someone that you have complete trust in.
Where Can I Find a Staker?
If you are a staker looking for a player to give money to, your options are wide open. The rail of every major tournament is filled with players looking for a staker. The vast majority of these railbirds are losing players. When an unknown player that you don’t really know asks you for a stake, you should always say no.
For good staking opportunities, you can generally just follow the twitter feeds of top players around WSOP time. You’ll see plenty of tweets trying to sell pieces. If you are such a staker, keep in mind that even top players generally have < 30% ROI in major events and that buying pieces at more than a 1.3 markup is almost always going to be a negative EV proposition. But plenty of well known players will sell big pieces of themselves at 1.1 or even at face, rather than miss an opportunity to bracelet in a big buy-in event that they would otherwise have to miss. As a staker, you have the money which gives you leverage. Everything is negotiable, and a solid player who is trying shooting for a favorable deal can easily be talked down a few points the closer the tournament gets.
As a player, your options are limited. If you are already a household name, the stakers generally approach you. If you have solid OPR stats or can otherwise prove a high ROI, you might be able to conjure up some stakers on one of the many poker forums. Otherwise, you are limited to friends and family.
Put it out there on your Twitter and Facebook feeds that you are looking to get staked in some upcoming poker tournament. Explain to your coworkers that previous WSOP champions such as Chris Moneymaker, Greg Raymer, Jamie Gold and Joe Cada were all backed. Tell your grandma the story of how Jeff Madsen turned a $6k loan from his grandparents into two WSOP bracelets. Remind your home game buddies that Steve Dannenmann sold half of his action in the 2005 WSOP main event to one of his home game buddies, and that how that $5k investment turned into over $2 million. Convince your brother-in-law that you’ll be able to play a more aggressive style if it’s his money at risk rather than your own.
But don’t email me or other random poker pros asking for a stake.