What is Sweat Equity
Sweat equity as the name suggests is a reward you get when you invest yourself instead of your money. It can be earned by providing know-how, making rights available in the nature of IPR, or simply sweating off your own brow. This type of strategy to add business partner is famous among the startups who don’t have sufficient fund to add to their business.
To understand it better, let’s take an example. Suppose Mr. Abott invested $40,000 in his business and after 8 months, he sells 25% of the stake at $20,000 which makes Mr. Abott’s share at $60,000. So the extra 20,000 is his Sweat Equity.
Here are some legal tips to add a business partner through the means of sweat equity.
Performance Criteria and Vesting Period
When you set up a reward for hard work it is best to set up the standard of Performance required, goals to be achieved, nature of work etc. It helps the person working to stay focus and determined to stick to his work. Setting up Performance Criteria will help you achieve success and reduce the ambiguity in work. Also, stating clearly how long one has to work before becoming a partner or before he gets his equity vested in the business.
Nature, Formalization, and Separation
There are different types of shares one can receive from a company. Making sure Nature, Number and type of share you will get will help you understand the work in a better way. When only a month is left you don’t want to see a termination letter in your hand, all the hard work you did must pay off. Making sure in what all circumstances you can lose your ownership of the firm and making yourself cognizant of all the paperwork can help you get your return.
Having its origin from Silicon-Valley, this non-cash incentive can be issued to anyone from whom the company has benefited directly or indirectly, and all the agreements related to it have to be in writing.
Originally posted 2017-11-07 19:47:49.