What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


What Is Sweat Equity Worth?

Original post by Geri Terzo of Demand Media

It can be difficult to measure sweat equity.

Sweat equity involves sacrificing now for the expectation to share in profits later. Placing a monetary value on this notion involves examining a series of criteria, some more quantifiable than others, and agreeing to some future entitlement for the participants involved. Each contributor to some business or project might value sweat equity differently, and it is typically up to the top executive to establish the worth of each contributing member.

Contents

Identification

Sweat equity is a concept that is prevalent among small businesses and start-up companies. Entrepreneurs who have ideas, business plans and partners might not have the capital to bring the concept to reality. Sweat equity represents the contribution and value deposited by co-founders and the first employees of the business. Instead of being rewarded monetarily, these individuals agree to be rewarded in other ways, such as obtaining equity ownership in the business. Sweat equity's worth is determined by a business owner based on a number of factors, according to "Entrepreneur."

Features

There are certain abstract and subjective factors that can help a business owner place a value on sweat equity. The dedication exhibited by a co-founder in particular should play into assigning a value to sweat equity, according to "Entrepreneur." This can be measured by the likelihood that the individual will remain with the business over time. The unique value that an individual has to offer also plays into assessing the worth of sweat equity.

Commensurate Salary

The original staff members in a business who accept sweat equity are earning a monetary salary that is below each individual's earning potential in exchange for future profits. Sweat equity's value can be determined by assessing the salaries each participant could feasibly earn elsewhere fulfilling a similar role, according to "Entrepreneur." Using each salary, and possibly enhancing the amount with some premium to offset risk associated with a start-up business, could lead to placing a value on sweat equity.

Consideration

Sweat equity is not reasonable compensation, another "Entrepreneur" article suggests. The article suggests that a business owner who accepts sweat equity for what he believes is in the best interest of a company is exhibiting signs of weakness to employees. Instead, the article suggests the business owner should be paid an acceptable salary based on sales generated at the company. A possible salary model to replicate for the top executive may be 3 or 4 cents earned for each dollar brought in through sales.


                   

Resources

References

About the Author

Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.

Photo Credits

  • Comstock/Comstock/Getty Images


Advertisement