Sweat equity is a company’s stakeholders’ contribution towards the business in the form of non-paid labour. Also referred to as “stock for services” or “equity compensation”, this model enables founders to receive the expertise and services they need by signing off a portion of their company.
The ownership shares that are exchanged in the process are also known as sweat shares. Shares are traditionally traded for money, but with sweat equity what is valued is the amount of time spent developing a business.
Sweat equity varies from business to business, but the general rule is to calculate the value of each share before allocating it. For example, if a £100.000 business issues 10.000 shares, then each share is valued at £10. So if the sweat equity delivered work is agreed to be worth £10.000, then the number of shares given away is 1000 (10% equity).
Sweat equity comes with a risk from both parties, but the rewards can be larger than anticipated.