Sweat equity

Definition

Ownership earned by putting in work instead of money at closing.

Why It Matters

It is the phrase most often used to describe what a searcher contributes, and it is the one an SBA lender cares least about: the program wants a cash injection, and hours worked are not cash. Where it is real is between partners, where one puts in money and the other puts in the years. There the workable version is a written vesting schedule, not a handshake about who deserves what later.

In numbers: A partner earning 20% of the equity over four years, in a $4M business bought with $1M of equity, is receiving about $50,000 a year of value, which is a salary decision as much as an ownership one.