Backing and Motivations

As I went over in my last column, one of my goals for 2016 is to get myself out of makeup. I realized just a little while after hitting send on that column that it’s possible not everyone who is reading this knows what makeup is, so let me explain that. Makeup is accrued in most long-term backing deals. One person pays for another’s tournament buy-ins with the expectation of recouping all money outlayed before any profit share. This total that is carried over from tournament to tournament is called makeup and it needs to be returned to the backer before the player makes any money. For instance, let’s say I play $40,000 worth of tournaments in the first six months of the year on a new backing deal and I fail to cash in any of said tournaments. Then, the next tournament I play is a $10,000 buy-in and I cash for $100,000. My backer is first returned the $40,000 for the first six months of tournaments and the $10,000 for the last tournament I played. Once that is complete, we split the remaining profits at whatever rate our agreement allows.

This can lead to some interesting and unbalanced motivations on the part of player and backer. For instance, let’s say that the backer has two players that play tournaments for him and they both enter the above $10,000 tournament. Player A has $100,000 in makeup and Player B has no makeup whatsoever. The backer is rooting for Player A much more than Player B because if Player A cashes for $100,000, the backer receives $100,000 and profits $80,000 ($100,000-$20,000 in buy-ins). If Player B wins $100,000, the backer receives $100,000 but only profits $35,000 ([$100,000-$10,000]/2 – $10,000).

In addition, Players A and B have different motivations. Let’s say in different iterations of the tournament they end up at the final table individually. First place is $150,000, second is $100,000 and it goes down from there. Player B is going to make more purely positive expected cash value decisions because they are on a pure profit share of all money made in this tournament. Player A will probably make more positive expected chip value decisions regardless of their expected cash value counterpart because the only way they make any money is to finish first or get to heads-up and make a deal. Sure, in a perfect world, they’d continue to make perfect Independent Chip Model (ICM) decisions at the final table, but the immediate ability to make money by finishing above a certain threshold is hard to ignore after battling for several days/weeks/months to clear your balance sheet.

One of the main reasons I’ve decided to discuss this concept is the recent focus in the poker world on markup and the perverse motivations associated with that concept. Tournaments can obviously be very difficult on your bankroll and your psyche when they are a major source of your income. As such, many people will sell action. Because they think they are a profitable player over the long run, they will charge a premium. Andrew Barber, the 2015 $10,000 HORSE event champion at the World Series of Poker has been on a bit of a crusade this year to out the problems with this idea. If you would like to gather more information on that, you can find him on Twitter or listen to some of the podcasts he’s been on. He discusses one situation in particular that I think is interesting and is similar to the problems mentioned above. Let’s say you’ve sold a package of events at 1.2 markup and you’ve sold 50 percent of yourself. This means that you keep 50 percent of your action, but only pay for 40 percent of the buy-ins. Thusly, you only have to have better than a -20 percent ROI in each tournament to make money.

You’ve found yourself with less than a starting stack in event 1 of that package with less than an hour to go in day 1. You aren’t in the money, but a big chunk of the field is gone. Tomorrow is a duplicate of today’s tournament that is included in your package. Do you now have a misaligned incentive with your investors? You have a similar amount of expected value (EV) in this situation as in the tournament the next day but you will have to skip event 2 if you grind this stack out to make the money. You are missing another opportunity to make the same amount of money as you’re in right now. Mr. Barber says that it would be almost irrational to play this short stack conservatively due to the opportunity cost of missing event 2.

I’m not sure he’s right and here’s my reasoning. Sure, the two stacks are worth roughly the same amount right now and you have to skip the second event in order to continue in the first thereby costing yourself another money making opportunity. However, due to the blinds being higher and you being closer to the money in event 1, you have an easier path to a greater value chip stack than you do with a starting stack in event 2. Your equity is much easier to realise. In my opinion then, yours and your investors interests are more closely aligned than he suggests.

Backing, selling, and swapping action are necessary parts of the poker world. Long-term backing can create some poorly aligned motivations but they are often still a good deal for both backer and player. Short-term backing deals can also be problematic, especially if a person is dishonest or not a winning player. Protect yourself when buying action, but selling at a markup is not as villainous as it’s being portrayed as lately. ♠

Gavin Griffin was the first poker player to capture a World Series of Poker, European Poker Tour and World Poker Tour title and has amassed nearly $5 million in lifetime tournament winnings. Griffin is sponsored by HeroPoker.com. You can follow him on Twitter @NHGG