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Sweat Equity: What is it?

Published on: 11/25/2022
By: Erwan Coatnan de Kerdu

Dernière modification le 28/11/2022 à 09:26 par Back Office Update - test

The start-up of a start-up is always complicated, especially due to cash shortages. In such circumstances, it is indeed difficult to make a company prosper, as the manager does not necessarily have the financial means to pay his employees and partners. Fortunately, there is a solution: Sweat Equity!

What is it? What are its advantages and disadvantages? We explain everything in this article.

Sweat Equity: Definition

What is Sweat Equity?

Sweat equity is a term that translates into French as “équité de la sueur”. Does this name surprise you? Well, you’ll see that it fits the concept perfectly. Indeed, to start up a company, it needs the intervention of several people (employees, investors…), but the problem is that the cash to pay them is often missing. Therefore, these people working for the prosperity of the startup accept to invest hard (they put all their know-how at the service of the company and devote time and effort to it) without being compensated in cash (or little). Equity is then provided in other forms: an equity stake in the company, shares in the company…

Understanding the concept of “equity”

In order for you to understand it better, it is important to understand that equity compensates for the lack of cash

A company’s equity is literally the people who contribute to its success and are not paid, or at least not at the level of the work done. For example, to put it simply, if a startup acquires a partner, that partner will compensate for the cash shortage, as he or she represents a capital of 100,000 euros. Similarly, an additional partner will represent 1 year of work for a new service.

Strict rules

You should know that everything that has to do with Sweat Equity is subject to strict weighting rules, whether it concerns fundraising, accounting, grants or the European fund.

What are the advantages and disadvantages of Sweat Equity for startups?

Before opting for the Sweat Equity system for your startup, it is important that you are aware of its advantages and disadvantages.

Sweat Equity and its advantages

First of all, the main advantage of this system is that you save money! In addition, your associates (partners, investors, employees, etc.) feel committed and are therefore more motivated.

Sweat Equity is also beneficial for your employees, because they can give their opinion about the startup and voice their potential dissatisfaction.

Sweat Equity and its disadvantages

The problem with Sweat Equity is that its foundations are fragile. Indeed, it is difficult to precisely define an equity value and managers do not always keep their promises (for example, employees do not always receive compensation commensurate with their efforts).

The result is sometimes altercations and even resignations, which is bad for the company’s future.

Sweat Equity: a springboard to your company’s success

Sweat equity is a great way to launch your startup when you’re short on cash. However, keep in mind that, if used improperly, this system can negatively impact your beautiful project.

Make the right calculations and be fair with your partners, and everything will be fine!


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