Sweat equity

Bootstrapping Term

The slang term sweat equity describes the business or asset value created by bootstrapping entrepreneurs without outside equity capital actually invested in the company.

Since company founders often work hard with little or no financial compensation in the early days of a startup, business value can increase through their unpaid labor and good decisions.

Most of the time sweat equity is a vague concept, not an accounting term or a measurable thing. But if a young company creates value through bootstrapping and then pivots to attract funding, it’s possible to measure the sweat equity value. When the first outside investors buy new shares, the negotiated price per share of the newly issued shares places a value on the existing founders’ shares. That pre-money valuation puts a number on founders’ sweat equity.

In the real estate world sweat equity refers to the increase of a property’s value resulting from an owner’s improvements in a property on their own, without hiring contractors.

 

Don Gooding

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