Sweat equity: what’s it worth?
So, how much is sweat equity really worth in the startup world? If you are the one putting in sweat in exchange for equity then most likely you overvalue your contribution. If you are a founder gifting equity in exchange for sweat than most likely you undervalue the contribution.
Before we get into the value of sweat equity, let’s look at why shares get traded for a person’s time in the first place.
Follow the money
One of the most common reasons that equity is traded for sweat is to replace the need to provide an employee a salary. This tends to occur on startup projects that have yet to fundraise and therefore there are limited monetary resources. Other instances where this structure is used include when an individual is contributing their time on a part-time basis and they have a regular income source (think “day job”) or the individual is receiving a small salary but is being given unlimited upside through the grant of an equity stake.
Cash is king
The reality is that sweat equity is far less valuable than the cash a founder or investor might inject into a startup. David Rose did an outstanding job of explaining this in a Quora post he answered. In summary, cash is more valuable because it can be used to buy other things with. Cash can be used to buy a particular skill set or solution. Whereas your sweat cannot be traded for other things unless you have the particular skill set that is needed.
Now it’s your turn. Are you putting in sweat in exchange for equity or the founder offer equity in exchange for sweat? What is it worth to you?