Sweat Equity refers to the non-monetary contribution from the promoters and key employees towards a company in form physical as well as mental labour and time dedicated to build the company.
Sweat Equity includes the efforts put in by the founders and key managerial personnel & employees to build the company.
How Sweat Equity is determined?
Let us understand Sweat Equity with an example.
- Mr. A founded a Startup.
- The total initial investments made by Mr. A is $5 Million.
- After 3 years, for further expansion, Mr. A decides to raise funds by selling equity in the business.
- So Mr. A sells 10% stake for $10 Million to an Angel Investor, which values the Startup at $100 Million.
- So now the rest 90% stake with Mr. A values at $90 Million.
- Deducting the initial monetary contribution by Mr. A of $5 Million in the Startup, we get $85 Million.
- This $85 Million is referred to as Sweat Equity.
If Mr. A has alloted stock options to key managerial personnel in the company in initial stages as non-monetary compensation, even they would benefit from the Sweat Equity.
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