Definition of Sweat Equity
Sweat equity is the term that’s used to describe any non-monetary contribution that a person or a company makes towards a business. In contrast to regular equity, which involves putting money towards the project, sweat equity is non-monetary and generally consists of providing time, work and intellectual property.
Sweat equity is super common across a range of different industries. Investors often provide both regular equity and sweat equity for start-ups to help to get them off the ground.
A great example of sweat equity is the decorating and renovation work that a property owner might carry out after purchasing a pre-owned house. Even if they happened to already have all of the tools and materials that they needed, they’d still be investing a chunk of their time to carry out the work. That work would be classified as sweat equity.
Sweat equity is relatively common amongst start-ups, especially when money is tight and the team is bootstrapping. Owners and early employees might accept a relatively low salary in exchange for receiving shares in the company. They might also be expected to work large amounts of unpaid overtime.
Some studies have found that sweat equity in the private business sector is equal to approximately 1.2 times the United States’ gross domestic product (GDP). If the same rate applies to the public sector, the total value of sweat equity could be equivalent to double the US’ GDP.
Why is sweat equity so important?
Sweat equity is important because it can combat a cash shortage that could stop a company from growing and later on achieving a higher valuation. For example, Google was initially built off the back of sweat equity, and today it’s worth over $1.5 trillion.
Can investors contribute sweat equity?
The short answer to this is yes. In fact, in many cases, sweat equity from investors is just as valuable as a cash investment. Investors can provide sweat equity in the form of offering advice, introducing founders to other investors and by acting as a mentor to the entrepreneurs they work with.
Where does the name “sweat equity” come from?
The idea of sweat equity came about when the American Friends Service Committee (AFSC) created a self-help housing project. They started using the term “sweat equity” in the 50s when they were helping farmers to build their own homes. In modern times, it’s most closely associated with Habitat for Humanity, which uses a similar model to help people to purchase homes by providing sweat equity to help to build both their own home and the homes of other families.