How to Recognize Sweat Equity

by Carol Deeb

Starting a business may require you to dedicate time which cannot be immediately compensated. The term used for the work that you do to develop your business before it's profitable is "sweat equity." There is value in your time, but sometimes it's hard to determine the dollar amount for it. Some partners in your business may invest money, while others do the work required to create new products or systems for your company. Fair compensation through company shares or future wages is decided by partner consensus. Therefore, recognizing sweat equity is important because it adds to the value of your business.

Identify the motivating partner in the business. The person who had the idea and found the partners may be the one willing to dedicate more time with sweat equity than the others during the building stages.

Evaluate the commitment level and contribution of each partner. Determine who will be investing funds, time or both. Those with jobs may not be able to contribute sweat equity as much as the ones dedicating full-time hours to the business start-up.

Document the amount of funds and time contributed by each partner. Those who support the business financially will receive a percentage of return on their investment. Decide how the ones who give their sweat equity will be compensated.

Formulate a time frame and value for the product or system being developed for the company. If a partner is creating the core basis for the business without compensation, then place a dollar amount on the work performed if you were to hire someone else to do it.

Allow working partners to draw a salary from the investment funds of the business. This should be carefully reflected in the accounting ledgers and proper withholding should be calculated.

Distribute more shares in the business to the partners who donate sweat equity in the start-up phase if there is not enough backing to pay them. This is one way to fairly compensate those who work the hardest, but lack the funds to pay themselves.

About the Author

Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.

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