After a good scrute at mine, I concluded that the way it should be pitched as a tent, is with the shoulder extra flap on the inside. There seems a lot of confusion over this, but that's my take on it.
In that configuration, the arm holes should channel any water that gets into the closure flaps, to the outside.
It does seem a daft arrangement, that when you change from poncho to tent, you transfer the maximum amount of water to yourself! Also the shoulder flaps get in the way in the tent. But that looks to be the only way that the arm holes can be in any way waterproof.
I modified the stitching around the arm flaps on mine, to allow water to drain to the other side.
So I can now have the outside of the poncho as the outside of the tent.
As an aside to the lavvu mod people, and in case you feel brave....
I modified mine to add zips to the arm holes and the main button seems. So I can now zip both halves together as a tent, or as two ponchos. (I like the option of keeping the option of a poncho, as that excuses some of the weight that I am carrying.)
I also did it in a way that allows the buttons to still be used, rather than just trust the zips. The other mod was to make an A frame from some old fibreglass tent poles, so in place of the centre pole.
Just the central heating and kitchen sink to install.
Jules