Sweat Equity

Ownership in company, even a startup, can be shared. When shared the proportion each owner has is calculated based on what they brought in. For some owners it’s a straight financial transaction, for others – especially in a start up – some of that ownership comes from the hard work they’ve put in getting the business started. This share derived from work is known as “sweat equity”. It’s sweat equity that allows Mark Zuckerberg to retain a 28% equity stake in Facebook.

It’s often a highly valued part of the start up process for a budding entrepreneur, as explained in Blog Maverick, where Mark Cuban writes

Businesses don’t have to start big. The best ones start small enough to suit the circumstances of their founders. I started MicroSolutions by getting an advance from my first customer of $500. The business didn’t grow quickly in the first couple years. We didn’t grow past 4 people in the first couple years, and we all worked dirt cheap.

So what’s wrong with that? It’s OK to start slow. It’s ok to grow slow. As much as you want to think that all things would change if you only had more cash available, they probably won’t.

The reality is that for most businesses, they don’t need more cash, they need more brains.

The reality for entrepreneurs is that the less money they take from investors the great share of the equity they retain. But there’s a trade off – take no money and your opportunities to grow are reduced.

But recently I saw an article online that referred to increasing the value of your home by putting in “two weeks of sweat equity”. It seemed a weird use of the word to me, but in a sense it is exactly what hard work improving your house can be – you’re increasing the value of the asset by hard work rather than financing an improvement, and you’re also increasing the proportion of the asset that you own, since the bank is not adding an equivalent amount.

I then checked wikipedia, fount of all knowledge, and it appears I’m behind on my dictionary meanings, and Habitat for Humanity has used this model of funding to help people get into their home. A home that would otherwise be unaffordable.

image Sweat or rain? /Kullez/ CC BY 2.0

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