The phrase ‘Sweat Equity’ gets thrown around a lot, especially within the tech startup community. According to the Merriam Webster dictionary, the origin of the phrase goes all the way back to the (then) new found American dream of homeownership.
As more homeowners went the DIY route to enhance and in turn, add more value to their houses on their own toil, they earned sweat equity.
Sweat Equity : An interest or increased value in a property earned from labor toward upkeep or restoration. The term is used to describe the value added to real estate by owners who make improvements by their own toil – Wikipedia
Despite its frequent use within tech circles, the phrase seems to lack. The sweat doesn’t seem to add much value to equity. Why? Let’s look at how a modifier before equity could assist in specificity (among other things).
You’re sweating away because you’ve been given stocks in exchange for services that you have agreed to fulfill
A vested equity plan has got you sweating – You need to keep working for X years before you’ll have actual ownership of all the stocks you were promised
You have direct influence on the stock value and you’re sweating away to increase their long-term shareholder value (Ugh, it feels dirty to sound like a Wall Street banker)
You’re receiving only equity and no pay
You’re receiving below-market / depressed wages and equity
The list goes on, so the next time you’re chatting about equity over a no-whip skinny vanilla latte, be smart: Leave it at “equity” or use modifiers that add value (such as “vested” or “contingent”) or are more specific (“stock options”, “warrants”, “convertible notes”)