Frank DeGeorge

@FrankDeGeorge

The Basics of Staking in Poker

Hundreds of thousands of people visit our marketplace. In fact, we’ve had over 1 Million views since we launched just over 12 months ago. As a startup founder, this excites me, but also makes me wonder who are these people and how did they find us?

There are over 100 Million fans and players of poker. Nearly every professional player has either been staked or staked another player in their career. We pushed out a survey last year, and 92% of all respondents gave this same answer.

As we reach more recreational players and fans, part of our goal is to educate. There’s a (somewhat cheesy) video on our homepage and on youtube that explains from a high level in under 4 minutes. But even with this video and the occasional bad beat story, some basic information is still lacking.

That is why we asked former World Series of Poker Champion — Greg Raymer, and well known gaming and litigation attorney — Mac VerStandig, to write a Basics of Staking in Poker article. I’d like to share that piece here for anyone who is interested to learn and enjoy.

The Basics of Staking

By Greg Raymer and Mac VerStandig

What is staking in poker? Essentially, it is like investing in a startup company. You are paying money today in exchange for the future value of that company, or some portion thereof. In poker, you are putting up money which the player then uses in the game, in exchange for the future profit that player generates, or some portion thereof.

Most poker staking is related to tournament play, although it also exists in the cash-game arena. The person putting up the money, the investor, is frequently called the “backer,” while the person competing in the poker game is frequently called the “player.” The backer, or multiple backers, provides the money to pay the entry fee into a tournament, which is played by the player. The player can also be a backer, and be putting up some of the money themselves. If the player loses, the backers all lose. If the player wins, then the backers and player share the prize according to agreed-upon terms.

Backers often want to buy action in a player whom they consider to be a winner, somebody who is more likely than average to do well in the tournament, as a means of making money, just like any other investment. Players often want to sell off some of their action to backers, in order to reduce variance, or to enable them to play in an event that they otherwise cannot afford. In some cases the player will sell their action “at par,” meaning that a backer who invests by paying X% of the cost will receive X% of the win. However, in most cases, players will charge a “markup,” meaning that the investor must pay a premium. For example, if a player is selling action at par to the WSOP Main Event $10,000 buy-in championship, somebody who invests $1,000 will receive 10% of my win. If a player is charging a markup, the investor will have to pay more than $1,000 for 10%, just how much more depending upon the markup rate. A markup of 1.1 would mean that they must pay $1,100 for 10%, a markup of 1.2 would mean paying $1,200, and so on.

Sometimes backing arrangements are long-term, and involve the same backer or group of backers investing in the same player over an open-ended series of tournaments. Most often in such long-term deals the player gets a percentage of the cumulative win for all the tournament results, wherein losses and wins are combined. In many such cases, the backers are also paying for the travel and other expenses of the player, and these costs are also added into the cumulative total. These deals usually introduce a concept called “make-up,” wherein if the current cumulative total is a loss, the backers will continue to invest, but future wins must first cover this loss before the player is owed any share of the wins. It is very common for tournament pros to be in a losing situation, as most tournaments only pay about 10% of the field, and even the best pros will only make the money 20% of the time. With each individual tournament being 80–90% likely to be a loss, it is common for a player to have a series of losing results, with the occasional big wins making them a profitable investment in the long-run.

The first rule of staking a player, in the opinion of many, is that you should only stake a player you trust. If you do not trust them, it doesn’t matter how skilled they are at poker, they might take advantage of you. Staking deals almost never involve signed, written contracts; and even if they did, it is often not going to be worth your time and effort to sue a player who failed to meet the terms of the contract, as in most cases the money involved is not a large enough sum. The important thing isn’t that a signed contract exists, but that both sides of the deal correctly understand the terms. For example, if someone buys 10% of you in a tournament, is that person getting 10% of prize you receive, or 10% of the profit? If you were paid $2500 in a tournament that cost $1000 to enter, that’s a big difference. You might pay your backer 10% of the $1500 profit ($150), and think you’re doing what was agreed, while your backer may be expecting you to pay 10% of the $2500 prize ($250). Now you and your backer are unhappy with each other, even though you were both being honest, because you mistakenly did not agree to the same deal.

Most staking deals are handshake or verbal agreements between friends. There are also online forums where people make staking deals with what are, essentially, strangers to them. The money is transferred electronically, from one individual to another, and trust is gained by cultivating and maintaining a trustworthy reputation on the forum. If somebody on the forum, backer or player, engages in misconduct, their reputation on the forum will be appropriately tarnished, and they will find it harder to make future deals. Depending on the level of misconduct, legal trouble may also follow not far behind.

If the backer and player are not personal friends, then an end-to-end market, such as is offered by YouStake, can be the safest way to proceed. The intermediary takes funds from the backers and transfers it to the players, as well as transferring prize money from the player to the backers, and installs as many safeguards as possible in the process for the protection of both sides. It also serves the purpose of clarifying the terms of each deal, so misunderstandings as to the proper split of the prizes do not occur. It also enables the process of micro-investing. Players looking for backers in a $10,000 event often do not want the inconvenience of handling 500 separate $20 investments. But on a site like YouStake.com, it is just as easy for players to be backed by 500 investors as it is for players to have just one investor. And that also means backers who only want to risk small amounts can still find players in which to invest.

There is also an appreciable legal benefit to using a site such as YouStake, as players know that funds from backers have already been collected before a tournament begins, and backers know proceeds from a player will be collected almost as soon as they are paid out. Much of the risk is mitigated because the website — armed with contracts and enforcement mechanisms — ensures the bargain is honored on both ends. And by spelling out the terms of a stake on the website before any money ever changes hands, the odds of anyone feeling slighted or guilty over an honest misunderstanding also drop precipitously.

The end-to-end market also creates market efficiencies that benefit all involved. Players with laudable histories of winning have access to a broader base of capital with which to play more tournaments; members of the public well-schooled on late night poker television but perhaps not able to sweat rails in person are suddenly able to take a piece of their favorite players. And with the wealth of players listing for overlapping events, markups tend to fall into a mutually beneficial equilibrium.

Staking has long played an integral role in the poker world, and shows no signs of dissipating as it evolves alongside the game. Poker, once a game that thrived solely in felt-coated cardrooms, saw its ranks of players and fans swell to unprecedented levels when the internet took on a supporting role. The staking process has enjoyed the same transformative renaissance, with handshake deals now supported by online operations like YouStake.

To be sure, staking is really akin to investing in a startup company. And just as startups brought greater opportunity to entrepreneurs and investors alike when web-based crowdfunding took hold, staking is now following suit through near-identical means.

Full Disclosure: Greg Raymer is an active member of YouStake.com and Mac VerStanding is outside general counsel to the Company.

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