Sweat equity is a person’s or company’s commitment to a business venture or other enterprise. Sweat equity is typically non-monetary and takes the form of manual labor, emotional commitment, and time. Sweat equity is popular in real estate and manufacturing, as well as in the corporate sector, especially for startups.
Sweat Equity for Tech Startups is a hot topic in the entrepreneurial world. Many startup entrepreneurs are struggling to get their companies profitable. The primary reason behind this is poor planning, financial assumptions, and too much spending. The result – a company with limited growth potential.
In contrast, what could be considered Sweat Equity for startups consists of the same factors that caused a company to fail. However, because companies just starting out do not have an existing customer base, management cannot assume they will succeed. There are two factors to consider here. One, how much of the capital cost can the investor bear, and two, is the potential return worth the capital to the investor.
To determine the equity amount to include in your offer, divide your total startup capital by the total number of shares you are offering. This will give you an idea as to how much equity to offer to your prospective investors. There are some companies where this is done exactly by dividing the capital by the total number of shares outstanding. Unfortunately, for most startups, this is not an option. The only option is to make an estimation based on your revenue and expenses. This process is more involved and may require the help of a third party.
Some investors will try to help their novice entrepreneurs by doing this calculation for them, but it is unlikely that every investor will do this. Therefore, you have to be creative in coming up with your own method. Here are some tips that might help:
The most important part in determining the equity for your startup is the total cost that you will have to raise. This includes everything from office space to marketing and product development costs. You need to know how much the total cost will be before you make any commitments to angel investors. This is an important step in securing capital and will be contingent on the type of business you are in.
Determine your Exit Strategy.
Investors have different investment objectives. Some may want to see the company through and sell it after a period of time while others prefer to use the equity as a means of obtaining repayment of the loan. Based on your company’s potential exit, you will also have to determine if you will need more money to finance the sale or not. All these are important things to consider before approaching any investor.