What can you do as a partner if you do not have money but are looking to get equity in a business?
One way to contribute to a business is with "sweat equity."
Sweat equity is a contribution to a business, project, or enterprise that is given in effort and work -- thus the name "sweat equity."
A Sweat Equity Agreements itself does not have any monetary value, but it offers work and value-enhancing actions performed by owners and investors.
Why is Sweat Equity Necessary?
Sweat equity is as valuable equity when the partner does not have money to contribute.
Sweat equity works to build up value of the business to be more valuable than the original value, and this is an important part of business ownership.
Many Sweat Equity Agreements will rely on one party investing funds to a business, whilst the other invests time and effort of the same value so that the business can progress and become more successful.
Investors and entrepreneurs alike always want to see their venture translate into financial success, and investors are always weary of the risk.
The concept of Sweat Equity is a term that is broadly defined as the increase in value that is created through the direct result of hard work. To be specific, it’s a preferred mode for entrepreneurs who don’t have the initial funds for their ventures. It’s literally the sweat off your own brow, quantified into a price tag.
Understanding Sweat Equity
Let’s taking Jane, she’s an entrepreneur who invested $25,000 dollars into her own start-up. After a year, her business takes off. She sells 30% of the stake to an investor for $60,000. This clearly defines the value of the company at $200,000 and of which Jane’s share is $140,000. Subtracting her initial investment of $25,000, her sweat equity is $45,000.
So in a way sweat equity quantifies hard work. It quantified Jane’s effort of putting in her time, without having access to a larger source of investment.
In large part, sweat equity can be also seen as a party’s contribution to a project in the form of an effort, as opposed to financial equity, where every member of the party supports a project, financially.
What is a Sweat Equity Agreement?
When you are establishing a partnership in business, you are entering into an agreement in order for the both of you to reach a common goal as partners.
Partnerships can be more efficient by sharing knowledge and resources so that you can reach a goal much faster and far more effectively that going in solo.
In a partnership, each party puts up a capital in resources or property in order to achieve the project, but sweat equity agreements are a little different. Rather than capital, each party pledges the value of an amount of work rather than capital values.
Irregardless of the terms of a Sweat Equity Agreement, you always need to make sure you have a WRITTEN Sweat Equity Agreement in writing to make sure your terms are protected.
Are You Looking to Form a Sweat Equity Agreement?
If you would like to find out more about how we can draft a tailored Sweat Equity Agreement to your business, contact business lawyer, Sam Mollaei, Esq. at email@example.com or via phone at (818) 925-0002