When you invest money into a business you are obviously demonstrating a degree of commitment and putting your trust in the company and its future fortunes, but what about if you offer sweat equity as a viable alternative?
As the description implies, sweat equity is a term used to describe a scenario where your contribution toward a business venture is physical, mental, and time-based, rather than putting cash in.
If you don’t have the cash to invest in a business but can offer your time and expertise it could be that the concept of sweat equity will offer a viable solution.
Here is a look at what is usually involved.
A growing concept
If you work in the construction sector there is a fair chance that you will already be familiar with sweat equity as it is a way of getting two people together on a project without the usual monetary investment.
For example, a real estate project where you want to flip a property for a profit would be a prime candidate for a sweat equity deal.
If you need to use builders, carpenters, painters, and any other trades that will require cash upfront to organize, it makes sense to see if you can do these jobs yourself to save money. Or you might be able to offer an agreed share of the sale profits to a tradesman in return for their labor.
In general terms, business startups don’t often have a lot of money and another instance of sweat equity would be when you or an employee accept a lower salary for your work in return for shares in the business.
This can be a great way of getting someone on board who may be too expensive to employ normally but can add value if they are prepared to embrace the sweat equity concept.
A formal agreement
Although the idea of sweat equity might seem more informal compared to a straightforward salary and share options package you might offer an employee it is still an arrangement that is usually bound by specific legal terms.
A typical sweat equity agreement is designed to acknowledge the unpaid contribution you are making toward a venture and sets out how you will be rewarded for your efforts outside of any monetary terms.
Using sweat equity agreements is generally viewed in a positive way as it can boost the value of a business because skilled workers are on board at an early stage without costing the full market rate.
A potential issue that you need to be mindful of when it comes to offering a sweat equity agreement is that it could mean you give too much of the business away at an early stage. This could prevent you from offering equity to late-stage investors at a point when you might need it.
It would be a good idea to get professional guidance if you are thinking about using sweat equity as a viable alternative to financing a deal but it is an idea that offers the potential to achieve your aims without costing too much money upfront.