Definition
Sweat Equity
Sweat equity is shares issued to founders or employees in recognition of their know-how, intellectual property or value addition, rather than cash.
Under the Companies Act, a company can issue sweat equity shares to directors or employees at a discount or for non-cash consideration, rewarding contributions such as technical knowledge, IP or effort. There are limits on the quantum and a lock-in on such shares to prevent abuse.
For startups, sweat equity is a way to compensate founders and early team members who build value without drawing large salaries. It differs from ESOPs, which are options to buy shares later, in that sweat equity is shares issued directly.
Related terms
- DilutionDilution is the reduction in existing shareholders' percentage ownership when a company issues new shares.
- ESOP PoolAn ESOP pool is the block of equity a startup sets aside to grant as stock options to employees.
- Founder VestingFounder vesting is the arrangement under which founders' own shares vest over time, so a departing founder forfeits unvested equity.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.