A sweat equity agreement is a legal contract that grants an individual or group ownership (equity) in a company in exchange for their time, effort, or expertise — rather than a cash investment. It’s a common tool in startups to reward founders, early employees, or advisors who help build and grow the business from the ground up.
Key Elements
Benefits
What is the purpose of a sweat equity agreement?
A sweat equity agreement ensures that contributors who provide time, skills, or expertise are fairly compensated with ownership in the business. It formalizes the terms, preventing misunderstandings about equity distribution and aligning everyone’s interests toward the company’s success.
Who typically benefits from sweat equity agreements?
Sweat equity agreements are commonly used to reward co-founders, early employees, or advisors who play a critical role in the startup’s development but may not receive immediate monetary compensation. For example, a technical co-founder might receive equity for building the company’s product in its early stages.
How is sweat equity calculated?
Sweat equity is usually calculated based on the perceived value of the individual’s contributions compared to the company’s overall worth. Startups may assign a monetary value to the hours worked or expertise provided and convert this into a percentage of ownership. Negotiation and market standards often play a role in determining the exact equity share.
What should be included in a sweat equity agreement?
A sweat equity agreement should include details such as the roles and responsibilities of the individual, the percentage of equity granted, a vesting schedule, and any conditions for ownership (e.g., continued contribution or performance milestones). It should also outline what happens to the equity if the individual leaves the company.
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