Is there a good way to calculate the value of sweat equity?

Sweat equity has no real monetary value until you either get a dividend from it or you can sell the shares in an “exit”.

Less tangible value comes in the form of having “skin in the game” or a sense of ownership or superior status to other employees. Warm fuzzy feeling value, not hard cash value.

The opportunity cost is probably easier to quantify if you have to give up a better paid job to join the business our have a good measure of your market value to more established employers who pay their senior people solely in cash.

It’s still an important decision when you take sweat equity in lieu of salary and there are ways of getting at a value. If you are being given shares alongside or close to a cash investment round, there will be an agreed value for the business at that point in time. So a cash investor putting in £2m for 25% of the equity must think the business will be worth £8m after the cash goes in. If your sweat equity offer is 0.1%, you would have £8,000 worth of equity at that valuation.

No one invests for sweat or cash equity purely on the basis of an assumed valuation of the business now. It might be a loss making start-up and need to secure some big contracts to reach break-even. Equity is all about possible future value and that, by its very nature, is an unknown. Serious investors have a feel for the size of the market opportunity and how big the business might become, if successful, and how attractive it might be to trade buyers or the stock market. Institutional investors will want an exit in three to five years and they won’t be looking to make a10% return.

So think about what the business might become and what it might be worth on an exit. Look at similar businesses and see how they have been built and sold. 0.1% of £50m is £50k. Not exactly “beach money” as the private equity world terms it, but maybe a good return for the sweat.

But beware. Sweat equity in a family-run business with little prospect of an exit or dividend stream would probably be better termed “mug equity”.

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