is a term that refers to a party's contribution to a project in the form of effort --- as opposed to financial equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
, which is a contribution in the form of capital.
In a partnership, some partners may contribute to the firm only capital and others only sweat equity. Similarly, in a startup company
A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets...
formed as a corporation, employees may receive stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
or stock options, becoming thus part-owners of the firm, in return for accepting salaries that are below their respective market values (this includes zero wages).
The term used to refer to a form of compensation
Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary...
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
es to their owners or employees.
The term is sometimes used to describe the efforts put into a start-up company by the founders in exchange for ownership shares of the company. This concept, also called "stock for services" and sometimes "equity compensation" or "sweat equity" can also be seen when startup companies use their shares of stock to entice service providers to provide necessary corporate services in exchange for a discount or for deferring service fees until a later date, see e.g. "Idea Makers and Idea Brokers in High Technology Entrepreneurship" by Todd L. Juneau et al., Greenwood Press, 2003, which describes equity for service programs involving patent lawyers and securities lawyers who specialize in start-up companies as clients. New companies like Sweat Equity Connection
have been created to link founders of early stage companies in search of management employees and service providers with candidates who have declared their willingness to work for sweat equity in these type firms.
The term can also be used to describe the value added to real estate by owners who make improvements by their own toil. The more labor applied to the home, and the greater the resultant increase in value, the more sweat equity that has been used.
In a successful model used by Habitat for Humanity, families who would otherwise be unable to purchase their own home (based on qualifying factors including need, ability to pay, and willingness to partner) contribute sweat equity hours to the construction of their own home, the homes of other Habitat for Humanity partner families or by volunteering to assist the organization in other ways. (The amount and type of sweat equity varies by affiliate or office.) Once moved into their new home, the family makes monthly, interest-free mortgage payments into a revolving "Fund for Humanity"
which provides capital to build homes for other partner families.