Sweat equity is the ownership stake that founders or employees receive in exchange for their labor and contributions, rather than a financial investment. It represents the value of their hard work and dedication in building the company.
Why is sweat equity important for startups?
Sweat equity allows startups to attract and retain talent when cash is limited, offering team members ownership as a reward for their commitment and effort. This aligns everyone’s interests toward the company’s success.
How is sweat equity different from financial investment?
Unlike financial investment, sweat equity doesn’t involve cash contributions. Instead, it reflects the value of time, expertise, and effort contributed to growing the startup, often rewarded with shares or options.
How does sweat equity impact ownership structure?
Sweat equity can dilute existing ownership, as new shares are issued to reward employees or founders. However, it motivates team members to increase the company’s value, benefiting all shareholders in the long run.
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