Equity earned through work instead of cash investment. Common for founders and early contributors who can't take market salaries. The value is typically calculated based on hours worked at a fair market rate.
Why it matters
Most early-stage startups can't pay market salaries. Sweat equity lets founders and early contributors earn ownership through work, but only if you track and value it properly. Without a clear system, sweat equity becomes a source of conflict rather than alignment.
How it works
Sweat equity is calculated by multiplying hours worked by an agreed-upon market rate. If a developer's market rate is $150/hour and they work 200 hours, their sweat equity contribution is $30,000. In a dynamic equity model, this gets weighed against other contributions (cash, IP, etc.) to determine their ownership share. The key is agreeing on market rates upfront and tracking hours consistently. For example, if total contributions across all founders are $100,000 and one person contributed $30,000 in sweat equity, they own 30%.
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Equity Matrix converts time contributions to shares using market rates you set.
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