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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.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.