I just posted Why Sweat Equity Often Stinks on the gust.com blog for startups and angel investors. It’s quite cynical, I’m afraid, but it also reflects what I’ve seen for years.
Sweat equity is a dangerous concept. It’s way too easy to misinterpret and misunderstand. And whether it’s intended to be or not, it’s way too often used as a lure to get people to work for less than they are worth.
The good side of sweat equity is what startup founders earn by building their business. You create, work, develop, grow … and your business is worth more than it was. And you own the upside.
The bad side of sweat equity is that it’s so often just thinly-disguised exploitation.
Here’s my advice: if you’re getting paid less than your fair market value in a startup because you’re working for so-called sweat equity, understand that …
- unless the equity deal is in writing somewhere,
- and defined with real numbers including percent of ownership, shares and total shares outstanding,
- and real conditions such as vesting, and work expectations, what happens if you want to sell out and quit, what happens if they want to buy you out, and what about termination …
… then it’s probably not worth as much as you think.
And what makes it worse, quite often, is that the people making the empty promises don’t intend to exploit you. They mean it when they say it, early on. But then the money starts flowing, investors come in, the board changes, and promises can’t be kept. Unforeseen circumstances are very common. So what you get is an apology.
Some more advice: when I say get it in writing, I don’t mean a formal legal contract; at least, not necessarily. I’m a great believer in simple English signed by both parties, laying out what they think they’ve agreed to. Warning: I’m not an attorney. The attorneys are often valuable for pointing out all the issues to consider. But the big contracts usually end up in mediation anyway. Just make sure you have something written to remind everybody of what was promised.