Sweat equity is real equity. In fact, because many companies start life as nothing but the sweat of its founders, sweat equity is often what enables the company to achieve any future worth.
But real and quantifiable are not the same. Many savvy business people have wanted to put an exact dollar value on sweat equity only to be less certain than when they started.
Satisfactory numbers never easy
Many companies start among friends. Early employees are also often talented, optimistic people who can also see the dream your team is chasing. It can be hard to resist giving everybody 50 percent.
It’s obviously better to take a more realistic approach and the earlier in the life of the business you can establish your method of calculation, the better. A qualified and experienced attorney will help you make the decision in a way that’s not only reasonably accurate and equitable, but legally defensible.
Some elements of workable approaches
The value of the business needs to be estimated. Looking at the startup capital and adding other quantifiable assets the business now owns is one method. Instead, and probably more reliable, you could compare your company to others of a reasonably similar size and type in your geographical area or in a similar marketplace.
Next, set a stock value of the business and the value of each share or the percentage each partner owns.
A dollar value of a given person’s sweat equity is the hardest step but try to start with whatever quantifiable and objective measures you have as a baseline. Then fold in realistic assessments of factors like any time spent unpaid (perhaps adding the gains that would have been possible had those dollars been invested elsewhere) and adjustments for the risk incurred by delaying payment.
Finally, use the dollar value of the sweat equity to buy the shares in the company which that dollar value could buy. If you believe in your own valuation, perhaps the individual could take payment in either stock or cash, since you’ve accurately calculated a fair equivalence between the two.
