Business Advice, Equity

Six Points To Think About Before Offering Sweat Equity

Jamie Beaumont | 8 September 2021 | 3 years ago

Those early days in the life of a small business are fraught with risk and uncertainty. When funds are tight and you still need the assistance of suppliers to get your small business off the ground, offering those people sweat equity might start looking like an attractive ‘quick fix’and ‘free’ option to get the services you need.

Offering sweat equity means that you are giving away a small slice of your business to another party and making them a shareholder in your new company – which makes sweat equity far from a cut-and-dry or cost-less solution.

If sweat equity is something you’d want to offer to your early suppliers or employees in return for their hard work – there is plenty to think about beforehand.

Are you sure that this partnership can be long-term?

The equity of your business is precious. You don’t want to give it away to partners and suppliers who are only going to work with you in the short term. Before giving away equity, you need to be certain that these are going to be long term relationships.

Giving too much away only continues to dilute your equity. Remember that quality is more important than quantity.

Is this partnership likely to turn sour?

The last thing you want to do is offer sweat equity away to suppliers where a relationship could turn sour. Having shareholders who aren’t agreeable can damage a business and the prospect of taking on investment in the future. Before you think about giving away sweat equity, make sure there is very little risk of the relationship going south in the future.

Are you working with a true specialist?

If you’re working with a supplier who truly is an industry specialist, then sweat equity is definitely something you should seriously consider.

When your shareholders are the real-world experts, you’re mitigating the risks of making mistakes – plus you have the additional bonus of one day being able to sell their expertise to future shareholders and investors. Their knowledge is a commodity, take advantage of it.

Carefully assess the potential shareholders’ value: giving sweat equity away to any old supplier won’t add value to your business. If the services they supply are easily replicated, then it’s best just to take the one-time hit and pay for those services.

Are they really the best use of your equity?

Once you’ve given equity away, it has to be purchased back – it isn’t just going to magically appear again..

For example, if you’re looking to dilute 20% by raising investment, including giving away sweat equity (which would then raise that to 25%), then it’s worth analysing whether that 5% can be better used in future rounds to offer to more credible investors and individuals.

Have you discussed sweat equity with your investors?

Your investors have funnelled their finances into helping you launch your new small business, so they do need to be consulted on the addition of new shareholders.

You, your investors and this new potential shareholder are a collective who need to want the best for the business – so be up-front with everyone already in the partnership!

There might also be a scenario where your investors offer some more funds so that you can pay your suppliers.

Has your supplier done something like this before?

This is a complicated process, so if they have prior experience of this kind of deal – it will save your time, and theirs, in getting all the details ironed out.

If they have taken an offer of sweat equity before, it’s a good opportunity for you to carry out your due diligence! Investigate how their previous shareholding worked out before committing to anything.

While the decision to offer sweat equity might not be straightforward, asking yourself these six questions will help you make an informed and business-savvy choice so that you can start life at your small business on the best possible financial footing.

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