A and B invest together in a gambling bankroll. A invests 100 B invests 200. Bankroll wins 1000. A wants to invest an additional 500. What share of the profits should A now receive (before he was getting 33.33%).


Assuming the bankroll continues to win A should receive 33% of the first $1000 and X% of any amount over $1000, where X is higher than 33%.

Didn't we already talk about something like this?

http://forumserver.twoplustwo.com/47...oblem-1579198/

I think my response then still fits the question.

This isn't clear. Did A & B pocket the $1000 profit midgame? If so, then I would give A 75% of future profit (I assume this is just friends, not a business arrangement). Lower risk for B means a lower return. You also have to give B the option here to take back her original investment.

If A & B did not pocket the $1000 profit midgame, then they should treat it as if they did and both decided to fully reinvest their profits. In that case, A owns 33% of a $1300 bankroll. If he is putting an additional $500 capital into the bankroll, then he will have invested $933.33 into an $1800 bankroll. In that case he should receive 51.85% of future profits.

However, this should have been agreed upon when A added more capital. B's shares are being diluted and she should have been given the right to refuse (i.e. take back her original investment). If I was A, and this wasn't clarified at the time, then I would give B 66% of all final profit and make sure to do it right next time.

Aaron is correct that there are multiple Pareto-efficient ways to structure this, and which one you choose is best done through negotiation. I am assuming that in this case neither A nor B are trying to gain an advantage over the other, and so won't try to leverage their access to more capital to gain an advantage over the other.

The most likely answer is to going to be a basic share system. A initially had 1share, B 2. Share price went up from 100 to 333.33. If A wants to buy $500 more, that will get him 1.5 shares, giving him 2.5 total and B still with 2. If everyone agrees this is the most straightforward way to do it.

Edit: I assumed 1000 was the value of the bankroll and not 300+1000. Nothing changes but the arithmetic if that's the case.

No, the profit is still in the bankroll. Had the bankroll been broken and a new one created the problem would be much simpler.


I agree. You then also have to separate into time tables, where time period A which isn't so much about time as it about profits (profit period), so during profit period A which is 0-1000 the profits are divided into 33.33% and 66.666% and during profit period B which is 1000-infinity profits are divided on 2.5:2 basis

I'm not sure what you mean. You don't need to do any of this for the way I suggested. If another 1000 is won after A reinvests, A is owed (2500)*(2.5/4.5), B the rest. If you use a simple share based system, it automatically does what I think you are trying to do manually.

This is not what dessin said. He suggested (as did I), that you regard the $1000 as fully reinvested, which means that after period B all profits, not just profits over $1000, should be divided on a 2.5:2 basis (assuming profit was initially $700, not $1000 as originally stated). If the profit was $1000 at midgame, then A would get 51.85% of total book at the end.

but surely you will concede that B's mid game investment only warrants him to a larger share of future profits, not a larger share of past (pre additional investment) profits

Meh...i think this might confuse more than clarify. The first 700 in profits ARE split 2/3 and 1/3 and not "2.5:2" in the way we suggested.

But we should really just stop talking about profit all together. What matters is the price per share and shares outstanding. You don't have to worry about who owned what when X profit was made. The share system takes all of that into account without you keeping track of it.

Alright this is not just a theoretical matter I am in fact doing business with someone and want to ensure that everything is 100% fair (both to him and to me). My partner really has no idea and just goes along with what I say. Here are the exact specifics :

He invested $100 and I invested $200. We won 1440, of which I get a 5/6th share (50% to me for doing the work and 33.33% to me for my 2/3rds investor share). At this point he invests $500 more. Prior to this he was getting 1/6th profits. What % of future profits should he get from this point forward (remember I get 50% automatically and then we divvy up the rest based on however much is invested).

Is your 50% pocketed or does it stay in the bankroll? Either way, I don't like this.

If you're going to be taking a "fee" for playing, it should be separate from the bankroll. Otherwise, you're halfway freerolling your friend. The reason is that your setup means you have small downside risk but take full advantage of the upside of variance.

Let's put some numbers to this.

Scenario 1: He invests $100 and you invest $200 for a $300 bankroll. You sit down at the table and lose half the money. There's now $150 bankroll left. What percent is yours and his? If you get 50%, then you've automatically got $75, plus 2/3 of the remaining $75 for a total of $50 more. You have $125 and your friend has $25. Sucks to be him, losing 75% of his stake whereas you lost only 37.5% of your stake.

Scenario 2: He invests $100 and you invest $200 for a $300 bankroll. You double your money. There's $600 in the bankroll. 50% of that is automatically yours, so you have $300. Plus 2/3 of what's left for another $200, which means you have $500. And that leaves him with... $100. You got 67% return and he got nothing.

Basically, I'd hate to be your friend.

So the rest of this doesn't matter. You're just doing it all wrong from the beginning and you should reset and restart your calculations.

The most straightforward way to do it is just to temporarily cash out, him 1/6 and you 5/6. Then each of you put in however much you want and make a deal again just like you did the first time.

Yes.

This was also suggested in the other thread.

It stays in the bankroll.

No this is completely standard, at least in professional blackjack. The investors take the risk, so they get half, the players do the work, so they get half. Why would I let someone invest in my gambling and do all the work just so they can get all the winnings? That makes no sense.

I see your confusion. In this scenario of course the player's share would be nothing, since it is a losing position. So it's the same 33.33% to 66.66% ratio. Assuming the bankroll was broken at this point it would belong $50 to him and $100 to me. What I should have said is that 50% of profits go to me for the players share, as I am the only person playing on the bankroll, and then the investor's share is split up according to the investment.

No. In this scenario there is $300 profit. So 50% players share of profits ($150) is mine, and then 2/3rds of the investor share is also mine ($100). So I get $250 and he gets $50. But I have also done all of the work and taken 2/3rds of the risk so it is fair. And it's actually best to set it up this way with him being a minor partner, because then in the case of a downswing virtually all of that pain falls on me. If we're up say $1000, and I lose $500, 5/6th of that $500 would have been my money. so i'm out $420 or w/e it is. so there is a strong incentive for me to play well.

Then what are you cashout conditions?

Why does anyone ever need to be staked? Because the player either doesn't have the capital to play the game or because the player wants to mitigate risk. Otherwise, you would never have any reason to want other people's money in the pot with you when you can just take it all yourself.

I'd be wary of "reinvestment schemes" like this one where your fee is still live in the bankroll. It really muddies up the level of investment. What you're basically setting up is that you're taking your cut and then automatically re-investing it. But your friend has no defined reinvestment opportunities.

Okay.

What I see is that you've made 83% profit and he's made 50% profit. That seems far less fair. So what's "fair" depends on your point of view. Your fundamental concept that you get 50% of the winnings for the "work" you've done leaves me scratching my head.

That's not what I see. When you lose, you both lose the same percent. But when you win, you win at a faster rate than your friend. That means that he's accepting a greater risk than you are because his upsides are smaller than yours but you have equal downsides.

You mean that you have a stronger incentive to play well *when you are winning* because you're still halfway freerolling your friend. You win bonus when you win, but when you lose he eats the cost at the same rate you do.

He's describing a standard staking arrangement - I don't see anything obviously exploitative in what he's doing.

Claiming a "player's share" of the winnings may not be "obviously exploitative," but it's mathematically true that the friend is taking on a larger risk (as a percent of investment) under any distribution of winnings that includes the potential of losing.

Edit: Between friends and playing on the order of a few hundred dollars, I'd feel like a jerk charging an investment fee. Maybe that's just me.

Edit 2: To relate this to my own experiences, I have a friend who liked to bet on horses, and I would join him at the tracks sometimes. I don't know that much about horse racing, so I'd "buy-in" for $100 or whatever on his betting, and then we'd split by shares at the end of the day based on how much he wagered. It would never occur to him (or me) that he would collect extra an fee for being the one who is making the wagers.

Something like the market price for staking is the setup described by Omaha. For Omaha to not take that market price is equivalent to giving a cash gift to his friend (this shows where your horse-betting analogy breaks down). You're suggesting that Omaha should give cash gifts to all of his friends if they decide to invest in his poker-playing. Actually, you're suggesting if he doesn't give his friends this gift that he should feel like a jerk.

I pretty much completely disagree fwiw. I think loans between friends are very dangerous and that both sides should attempt to find a market rate or use standard financial practices for determining the creditworthiness of the borrower. If preferential terms are given, the person doing so should view this as a gift given because of actual need on the part of their friend. I take Polonius's admonition to heart.

If you're thinking of it like a true investment, then I'd be pretty hesitant to do it at all. Normal businesses between friends (and family) can already be quite dangerous. Throw in the expected swings of poker, and you've got a recipe for disaster.

If you're just throwing money around and having some fun, then don't take a fee. Because when you're friends just having some fun, why would you take a fee?

I think loans between friends is dangerous if you expect to be paid back. There have been a few instances where I've loaned friends money, but (upon evaluating my financial situation) I decided *in advance* that even if the money never came back, I'd be okay and could live with the loss. And that approach/attitude has served me well thus far. I'd never loan any amount of money I wouldn't be comfortable setting on fire. (Well, setting it on fire is wasteful. Maybe we'll say "donating to some cause.") And I don't charge interest.

If you have a friend that needs a serious loan, they should go to a bank. If the bank won't loan them money because of credit unworthiness, then you shouldn't be doing it, either. And if they can get it through a bank, why would you want to put this between the two of you?

Edit: I couldn't care less about what the "market" is doing. Between friends, it's not friendship and not capitalism.

I agree that you shouldn't take a fee when playing with friends. However, since the division of profit is zero-sum, I think the market price should set the value of the stake. Thus, from my perspective, you are the one asking the player to pay an extra fee to the investor.

Markets are good at price discovery, and since we are talking about pricing risk, you should care about what the market says.

EDIT: Here's one way to think about it. Let's say one of your friends asked you to stake him. Would you be comfortable asking him to accept these below-market rates just because he is your friend?

Indeed, I am. It's not clear to me in OP's scenario who asked who for what. If OP asked his friend to invest, he ought to be more generous to the friend. If the friend wanted in, OP should either offer straight shares or say that he's not accepting outside investment.

If it's an investment, I'd agree with you. Due to the small quantities of money involved, I don't really think of this as a true investment and so I don't treat it as such.

If a friend is asking for a stake, I just wouldn't use this type of model. I would want my friend to get into a place of not paying me money as quickly as possible. And this is a different approach than what you would do with true staking. True staking is about seeking long term profit for yourself. Staking a friend is about giving a friend a chance to sink or swim and not about your own bottom line.

The problem with your criticism of Omaha's staking arrangement is that it presupposes its illegitimacy. You sound like you are criticizing him for not giving a fair deal to his friend, but really you are criticizing him for allowing his friend to stake him in the first place. That's fine. I disagree, but that is defensible.

However, given that friends are deciding to enter a "true" staking arrangement, there is a separate question as to the best way to do this. I've argued that market terms is the best way to price the stake. Do you disagree?