Legal & Equity
Sweat Equity
Also Known As
Work for EquityFounder Equity
Sweat equity is company ownership earned through labor and effort rather than cash investment, typically granted to founders, early employees, or advisors who contribute work in exchange for equity.
What is Sweat Equity?
Sweat equity represents ownership earned through work. Instead of buying shares with money, you earn them through your contributions to building the company.
Who Receives Sweat Equity
- Founders: For starting and building the company
- Early Employees: Pre-funding team members
- Advisors: For guidance and connections
- Contractors: Sometimes in lieu of payment
Sweat Equity Considerations
Valuing Sweat Equity:
- What would you pay for this work?
- What's the opportunity cost?
- How critical is the contribution?
Legal Structure:
- Stock options (most common for employees)
- Restricted stock (founders)
- Profits interest (LLCs)
Tax Implications:
- 83(b) elections
- Strike price considerations
- Ordinary income vs capital gains
Sweat Equity in Studios
Venture studios often provide:
- Sweat equity to EIRs who become CEOs
- Equity to studio team for portfolio contributions
- Equity grants that vest with company milestones
Example Usage
“Before raising funding, the technical co-founder earned sweat equity by building the entire MVP.”