Selling myself long
On poker and equity agreements
When I say poker people might imagine players sitting next to bricks of cash at a final table on television. The stakes were high but often not as high as it appeared — at least for the pros. Professional poker players with few exceptions have been staked, swapped, cross-booked or sold action. In a $10,000 buy-in tournament, like the World Series of Poker (WSOP) main event, even a successful¹ pro might swap or sell action to diversify or hedge risk.
Most often equity agreements occur before the tournament starts, sometimes they do not. The 2012 WSOP main event final table featured this latter type of deal².
Greg Merson and Jesse Sylvia were effectively playing for the bracelet and not the $3.2m difference between 1st and 2nd place finishes. While I’m not privy to the specifics, the web of swaps and stakes made the deal semi-public knowledge. This behavior is prevalent because proper risk management can make or break a player’s bankroll.
For over a decade as a professional poker player, I was a witness and party to countless equity deals like the one above.
Income Share Agreements
Looking back on my time as a professional poker player, I can’t help but compare these agreements to income share agreements (ISAs). ISAs are essentially equity stakes — often between an entity and an individual — that have predominantly targeted a small set of vocations. For instance software engineering via coding schools.
Where risk is hard to quantify, ISAs have begun to fill a gap that loans (debt) have left open. Younger generations are more conscious of how student loans can burden them later on in life. ISAs could be a solution to a trillion-dollar problem.
Poker players have never used debt to fund “operations.” Equity is much easier to reason about given the constraints of the game. The poker ecosystem provides unique insights for emerging ISA applications.
Poker Sense and Sensibility
I started playing online poker at 18. Soon after I found myself driving an hour to Morongo Casino, an Indian gaming establishment in California. Before long I was taking shots at the highest stakes I could stomach — even if this meant splitting or selling action to friends.
Playing higher stakes and taking the same amount of risk or “action” is suboptimal at best and reckless at worst. More information or data is required to justify a greater risk. Information like a known ”whale” (wealthy recreational player) sitting down to play higher stakes. Before online tools and databases of poker hand histories were available to profile opponents playing higher stakes arguably made no sense.
Despite this, my friends and I wanted to play nosebleed stakes³, win big pots, and build massive chip stacks. Part of the appeal of most gambling is known as the sweat. The bigger the action, the bigger the sweat.
Zero-Sum Sweating
For some poker players, the second best thing to winning is losing. All that matters to these players is to be in action. I would extend that beyond personal action and include sweating others. Anyone who watches and feels vested in a sporting event will understand. Sharing action helps people surf a bigger wave.
Sharing is not the term used to describe how pro players make equity deals. As the saying goes “No gamble, no future.” Too much gamble also no future though — so players swap, sell pieces, or get staked fully. Pros charge a markup (premium) on equity if they can. They acquire equity in each other or find promising pro players to bankroll.
Poker players are uniquely in touch with the risk they take on and how to mitigate it. They are hyper-conscious of expected value (EV)⁴ and risk management. If players are not, they rarely last long. Poker is a zero-sum game⁵ after all.
Offloading Risk
The following summer after turning 21, armed with a few years of playing poker professionally, I visited Las Vegas for the 2008 World Series of Poker (WSOP). Whether to play the series, side events, or cash games, the pilgrimage was almost mandatory for the global poker community. I had visited Vegas many times before but this summer I was a legal risk-taker. All I needed was someone to take a lot of risk on me.
Why? Having $50k to my name — although nice — was not enough to properly bankroll myself to play ~$80k in tournaments over 40 days. Tournament structures morph poker from a game to a sport increasing variance dramatically. At that time about 10% of the field received a payout from a tournament prize-pool — with the top three taking home the lion’s share of the money. Most pros have a losing WSOP while a small handful (a couple of dozen maybe) make out handsomely.
I received a $100k stake that summer via four text messages from someone who could not pick me out of a lineup. A friend with tournament history, translating to reputation, had vouched for me to his backer⁶. For the $100k stake, I was to get 40% of the earnings after makeup⁷.
I played over 20 tournaments that summer and used a majority of the funds allocated to me. I did not cash once. Believing myself to be plus EV much of this can be chalked up to variance. Variance is a risk.
The $100k package lasted into fall. I played off the remaining funds with dwindling hope of clearing prize money for myself. I made an earnest effort to salvage my showing. Reputation matters in poker.
In the end, I was able to salvage ~$40k in prize-pool earnings for my backer. Because I was a mere pony in his stable the year still turned out to be profitable for him. He was sharp, 21 years old, and saw the old guard of poker leaving money on the table for the “internet kids.” In a few short years of online poker young players had played more hands than lifers with decades at the casino tables. The results speak for themselves.
Selling, Staking, and Swapping
Poker games have moved out of the Wild West but they function mostly the same. Whether online, in Vegas or Macau — debt is tough to come by — equity is commonplace. This equity has traditionally come from two sources.
The first source is the venue: cardrooms, casinos, or online poker sites. Proposition or prop players as they are known are directed to help start and maintain games. They are paid an hourly rate in most cases, which acts more like a subsidy than an equity stake. Gains or losses from gameplay are the player’s responsibility.
Briefly, I played as a prop for UltimateBet, an online site that later came down because of an insider cheating scandal. I was given set times, stakes to play, and paid an hourly rate to play Limit Hold’em. I assumed the risk myself. In a week, prop playing started to resemble a job so I quit. These agreements were more popular before my time. I would estimate proposition gameplay accounts for very little of the action today.
The second source of equity comes from peers. They are the only ones who can price the market — this includes poker skill and reputation (credit). Peers do not pay hourly, they want the risk and preferably the reward.
In Vegas, a whale can walk in at any moment and the stakes might skyrocket 10x. Peers are needed to supply liquidity. Pros often need chips or cash immediately; what bankers call a funding gap. If my chips are in a safe-deposit box at another casino down the road, someone could lend me $25k. If they do I would offer equity for the liquidity provided.
Many forms of equity deals among peers exist. I have mentioned full staking for tournament packages and individual sales of action in high stakes cash games already. Another widespread tactic is known as “swapping.”
Pros want to hedge risk. Pros also understand the opportunity cost of capital — so they swap. Player A assigns 2% of prize-pool earnings to Player B and vice versa.
The most lucrative tournaments only occur once a year. Swapping helps pros diversify while remaining capital efficient.
I bought and sold equity to peers for all 11 years I was a pro. The frequency of money changing hands made this behavior less of a jump than it might be in other industries.
Technology startups using ISAs are often founded by software engineers. Software engineering is within the founder’s circle of competence. They are willing to make bets (take equity) on the product — a software engineering career — that they sell.
Poker has a legibility to professionals that lends itself to equity agreements as well. The ability to price expected value constantly at different levels of abstraction in hand, in game, and in stake is always top of mind. We calculate every opponent’s skills as a baseline for playing. Buying and selling equity is a natural extension from there and much easier to model than debt. Bankers can keep their debt. I’ll take an equity sweat all day.
Thanks to Lawson Baker for prompting me to write this. Additional thanks to Pat Cruse, Thomas Mareema, Art Parmann, and Alex Keating for their help with the post.
[1]: Loosely defined as a pro with tournament career cashes in the millions or who plays mid to high stakes cash games.
[2]: Independent Chip Model (ICM) is often used to estimate the value of each player’s chip stack against the prize-pool payout structure. Using this model and other factors, deals are reached for the majority or sometimes all of the remaining prize-pool.
[3]: $10/$20 No-Limit Texas Hold’em on Party Poker at the time.
[4]: Expected value (EV) often used to refer to the return on investment expected.
[5]: For every dollar won an equivalent dollar must be lost by opposing players and vice versa.
[6]: He had a 250k staking package and would keep a higher percentage of profits.
[7]: Staking packages commonly include a makeup clause in which the player repays the original stake from prize-pool earnings before receiving compensation.
