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Is there value in “sweat equity” for your business?

On Behalf of | Sep 30, 2020 | Entrepreneurial Law |

You’ve got the money to put into your start-up — but just barely. You would like to bring on a partner who has some significant expertise and creative talents, but they don’t have any extra cash to throw into the company right now. Does that mean you’re both out of luck?

Not really. It’s not that uncommon for one business partner to bankroll a new enterprise while the other offers up their “sweat equity” by working for free (or very cheaply) until the business gets moving. It’s often a win-win situation for both parties, as long as there are some clear agreements in place about what both sides are to receive out of the bargain.

You can’t exactly promise someone that their sweat equity will net them a specific dollar amount in return for every hour they work when your business isn’t even off the ground. Here are some things you agreement needs to address:

  • Exactly how much time does the other party have to devote to the business?
  • What is that party expected to produce or provide for the business? Is it some kind of tangible intellectual property, or do you want them for their general ability to attract clients and present pitches?
  • How will they be compensated? You need to think carefully about exactly how much stock or how large a share in your company you want to hand over.
  • What happens if they don’t come through with their end of the bargain? By what metric will their success or failure to earn their shares be measured?

Before you make any deals, it’s smart to speak with an attorney who understands the intricacies of business law. That’s the best way to make sure that your agreements are fair.