Is this how Sweat Equity is calculated?
I'm a non-founder of this company working on a deliverable that has a value of $5,000,000.
The founder decides if I do complete the deliverable, he will give me 5% stake in his company.
Assuming he gives me 5% stake in the company today, is my Sweat-Equity $5,000,000?
Another question; if does give me 5% stake but form some reason that increases the valuation of the company by more than 5,000,000... is all of that part of my sweat equity?
Thanks, Sadnan
If the company is worth $100MM then, yes, your sweat equity would be $5MM since you will get a 5% stake in the business. It seems, from what you're saying, that you will get 5% no matter what. If you think this deliverable could potentially be worth more than $5MM and you want to make sure you get your fair sweat equity, I would make that clear to the founder before doing the project.
I've never heard of a "calculation" for sweat equity. The $5m deliverable sounds like a good way to prove your worth, earn your stripes and get vested in the company.
Are you getting paid salary on top of the potential 5%?
Remember, founders have taken on most risk, made it through the hell of getting started, and have earned their stake. Have to prove your worth to earn a spot on the cap table. Don't get greedy. 5% of a something big can be a lot.
If you get 5% of the company that's been valued at $25m during a Series A funding round your stake would be valued at ($25m*.05) or $1.25m.
Then consider the upside in a sale - 5% of a company generating let's say $20m ARR sells for anywhere between 5-10x revenue (depending on industry and buyer)
$20m x 5 = $100m valuation --> 5% of $100m = $5m $20m x 10 = $200m ---> 5% of $200m = $10m
This ignores dilution in future rounds but still should give you an idea of a simple equity valuation ranges.
Why do people come on here for answers to their homework questions?
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