Sweat Equity

Dictionary Says

Definition of 'Sweat Equity'


Contribution to a project or enterprise in the form of effort and toil. Sweat equity is the ownership interest, or increase in value, that is created as a direct result of hard work by the owner(s). It is the preferred mode of building equity for cash-strapped entrepreneurs in their start-up ventures, since they may be unable to contribute much financial capital to their enterprise. In the context of real estate, sweat equity refers to value-enhancing improvements made by homeowners themselves to their properties. The term is probably derived from the fact that such equity is considered to be generated from the "sweat of one's brow."

Investopedia Says

Investopedia explains 'Sweat Equity'


For example, consider an entrepreneur who has invested $100,000 in her start-up. After a year of developing the business and getting it off the ground, she sells a 25% stake to an angel investor for $500,000. This gives the business a valuation of $2 million (i.e. $500,000/0.25), of which the entrepreneur's share is $1.5 million. Subtracting her initial investment of $100,000, the sweat equity she has built up is $1.4 million.

Likewise, the work an auto enthusiast puts into rebuilding the engine on his 1968 Mustang to increase its value would be considered sweat equity, as would the work done by a homeowner to install a new deck.

Valuation of sweat equity can become a contentious issue when there are multiple owners in an enterprise, especially when they are performing different functions. To avoid disputes and complications at a later stage, it may be advisable to arrive at an understanding of how sweat equity will be valued at the outset or initial stage itself.

comments powered by Disqus
Hot Definitions
  1. Legal Monopoly

    A company that is operating as a monopoly under a government mandate. A legal monopoly offers a specific product or service at a regulated price and can either be independently run and government regulated, or government run and regulated.
  2. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  3. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  4. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  5. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  6. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
Trading Center