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Sweat equity is a term used by the startup world to describe a non-monetary investment, one that contributes to a company via physical labor, administrative tasks or other types of work. This type of equity can be an important part of a startup, and a smart way to grow your business consistently over time. Essentially, instead of property, capital or resources, one partner guarantees the worth of his/her work.
In some cases, sweat equity may be coupled with a smaller financial investment, as compared to those made by other startup founders/partners. However, sweat equity is typically remunerated in the same manner as cash equity, often through stock distribution.
Not every startup begins with piles of cash, nor does every startup get infused with angel investment money or venture capital funds. Sometimes, a partner who is willing to work hard—both through long hours and physical exertion—is exactly what a startup needs.
However, sweat equity can be difficult to value accurately, and it is important not to overvalue it, though the value itself can be negotiable. The long-term commitment of the partner coupled with the long-term value of the sweat equity are what is most important to the startup company.
The single most significant thing to remember in regard to sweat equity is to put it in writing. All the duties that are encompassed in the sweat equity, as well as the valuation and compensation (whether in stocks, salary, cash, et al.), should be outlined in an agreement. This will ensure that all the partners/founders are in agreement and may also help the founders avoid disputes about the value of the sweat equity in the future.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.