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Sweat Equity

What is sweat equity?

Sweat Equity (also termed “stock for services”) refers to the equity an individual or service provider receives in a business as compensation for contributing (their time, effort, skill and experience) to the business.

In many cases startups have little money to pay for services, staff or resources, so sweat equity is commonly offered as an alternative to cash payment. By leveraging the potential for very high growth and value of the business in the future, equity in the startup can literally be used as real currency today. As such, sweat equity can sometimes substitute the need for business funding in cases where financial capital would otherwise be needed for payment of services, staff or resources.

Sweat Equity may take many forms. For example:

  • When starting a business, founders may determine the amount of ‘sweat’ (time, effort and value) each founder is to put into the business. Founders contributing more ‘sweat’ may receive more equity in the business.

  • When starting a business, some founders might put in financial capital to receive equity while other founders who don’t contribute any financial capital (or contribute less financial capital) may put in sweat equity to receive their share of ownership.

  • When starting a business, or with a startup already running, the business might require a key service, but as a startup it doesn’t have enough funds to pay for the service. So rather than offering financial payment, the business may offer equity in the business as compensation for the service provider’s effort. This could occur with all types of services, some common examples being tech/web development, sales, marketing, legal, accounting, and corporate advisory.

  • With a startup already running, the business might want to bring on more staff, particularly experienced skilled staff, but it doesn’t have the funds to pay market rates for these high value staff. Instead, the business offers equity in the business as compensation. By offering equity compensation, sometimes highly skilled and experienced staff can be brought on for significantly reduced, or even no wages.

Some key points to note about Sweat Equity:

1. The value of an early stage startup (without an exit option) is all based on its potential. Equity in a startup that has very high potential can be worth a lot, and it can often ‘buy’ a lot offering sweat equity. Equity in a startup that isn’t very high potential isn’t worth as much, so it can’t ‘buy’ as much.

2. The potential of a startup is highly subjective. Sweat equity can be used to ‘pay’ for services and resources but only if the individual or service provider believes in the potential value of the business.

This might be a suitable alternative to funding in cases where that service is a major component of starting up or growing the business (for example website or tech development) and funding would otherwise be needed to pay for the service.

Read more on other business funding options.