Sweat equity is the increased worth of a business (over and above the money invested) created by the unpaid mental and/or physical hard work of the founders, subsequent members and supporters.
What is sweat equity?
Well-capitalised start-ups have the financial capital to pay everybody setting up the business in full from the off. Many small businesses do not have the luxury of adequate supplies. Instead of start-up capital, they rely at least in part on the substitution of people working without pay. This is known as 'sweat equity investment'.
Sweat equity agreement
While a sweat equity agreement doesn’t have any monetary value in itself, it’s a contribution owners and investors make in the form of work to enhance the value of the business. Social business partners enter into a sweat equity agreement as a way to ensure they common goals are reached.
Unlike other business agreements where parties would pledge capital, as part of a Sweat Equity Agreement each of the partners pledges a certain amount of labour. Note that it’s still important to draw up a written agreement to make sure everyone upholds their terms.
How to calculate sweat equity
The easiest way to determine the value of your social business sweat equity is working out how much everyone would have earned for they work if they’d done it for another company. That said, the worth of sweat equity works out greater than the labour time, as it includes the value it’s added to the organisation.
Sweat equity examples
Sweat equity can take on many forms, from somebody offering physical trade services like plumbing or building, to somebody offering marketing assistance or financial accounting knowledge.
Le Public Space, a community owned Pub in Newport, had sweat equity agreements with some of their investors. For example, rather than investing money, one of the community members invested their time and skills, providing their services as an electrician, in exchange for a number of shares in the business. This was beneficial to the community member, as though they could not afford to buy shares, they still wanted to support the venture, and it was beneficial to the business, as they gained another valuable shareholder, whilst also gaining labour skills without having to pay out money at a time when cash flow was low.