Valuing Sweat Equity

Sweat equity is a concept that deals with the amount of value that is added to a company as the result of hard work by the owners of the company. This terminology is often used when referring to startup businesses. If you have a new startup business and you are trying to bring on investors, trying to value the amount of sweat equity that you have in the business can be difficult. Here are a few things to consider about valuing sweat equity.

Sweat Equity

Sweat equity is something that can drastically impact the success of a business. When the owner is trying to get things started, they may not have a lot of other resources to turn to. When you are new, you need investors to help get you started. These investors will want to know exactly what you have to bring to the table. The sweat equity that you have in the business is valuable and it should mean something to the investors. Many new business owners let the potential investors tell them exactly what their sweat equity is worth. While you may not have another choice, you should try to justify the value of your sweat equity to the investor.

What to Consider

When you are trying to evaluate sweat equity, there are a few things that you should look at. Every person is different and when it comes to valuing sweat equity, you have to look at the individual characteristics of that person.

For example, you should look at how committed the person is to making this business venture successful. Some business owners are more committed than others when it comes to making their new businesses successful. Business owners that are committed for the long haul are much more attractive to potential investors than someone who seems like they could quit at any moment.

Investors should also look at the unique perspective that is provided by the entrepreneur. The individual should be able to bring something unique to the table that is unlike what anyone else could provide. If the individual is just like everyone else, there is really not much of an incentive to invest in them. 

When considering investing in a new start up, the investor should also take into consideration if their goals and ideals match up with the entrepreneur. Ultimately, you have to have a good match in personalities and in the goals for the business. If one person sees this as an opportunity to create a Fortune 500 company and the other sees it as a potentially nice side business, this will not make for a good match. 

Assigning Value

Assigning a particular dollar value to sweat equity can be dicey. This is a gray area that does not necessarily have a specific formula. You could potentially multiply the entrepreneur's hourly rate by the number of hours that they have worked and then add something to that figure based on your observations. Ultimately, this number is negotiable between all parties involved.