Sweat equity is a term used to describe the contribution made to a project by people who contribute their time and effort. It can be contrasted with financial equity which is the money contributed towards the project. It is used to refer to a form of compensation by businesses to their owners or employees. This concept, also called “stock for services” and sometimes “equity compensation” or “sweat equity” can also be seen when start-up companies use their shares of stock to entice service providers to provide necessary corporate services in exchange for a discount or for deferring service fees until a later date, see e.g. “Idea Makers and Idea Brokers in High Technology Entrepreneurship” by Todd L. Juneau et al., Greenwood Press, 2003, which describes equity for service programs involving patent lawyers and securities lawyers who specialize in start-up companies as clients.
Sunanda Pushkar, friend of junior foreign minister Shashi Tharoor, may run into a legal wall over her offer to surrender sweat equity in Rendezvous Sports World, say lawyers. For one, there is no provision under the sweat equity rules for a company to take back the stake, says a lawyer who did not wish to be named. The issuance of sweat equity is itself under a cloud, he adds, as the rules stipulate that Indian companies can issue it only a year after incorporation. Rendezvous Sports World has reportedly been incorporated in August 2009. "Prima facie, the very allotment of sweat equity is flawed. Where is the question of cancelling it? If the guidelines have not been followed then allotment is itself invalid," says Abhishek Saxena, partner in Phoneix Legal, a corporate law firm.
"Surrendering already issued shares is not easy to do unless the entire allotment is cancelled on the ground that is invalid," said an another lawyer who did wish to be named.
However, declaring it invalid comes with a catch, too. In such a case, the entire equity structure of Rendezvous Sports World will have to be reworked. The rules impose stringent conditions on issuing companies, which also require prior permission from the Registrar of Companies.
What are Sweat Equity Shares?
Sweat Equity Shares are shares given to the employees of the Company for the efforts and work they put in. In India, the concept of SWEAT EQUITY SHARES was started by Infosys.
- Sweat Equity Shares are given to the employees at a discounted rate of market values.
- The whole idea behind giving sweet equity is to make the employee feel that he/she is the part owner in the company.
- When employees feel their company has their own funds invested in it, they get better motivated and work more earnestly towards company’s progress.
The term can also be used to describe the value added to real estate by owners who make improvements by their own toil. The more labor applied to the home, and the greater the resultant increase in value, the more sweat equity that has been used. Some home improvement projects have the potential to create more value than do other projects.
In a successful model used by Habitat for Humanity, families who would otherwise be unable to purchase their own home (because their income level does not allow them to save for a down payment or qualify for an interest-bearing mortgage offered by a financial institution) contribute up to 500 hours of sweat equity to the construction of their own home, the homes of other Habitat for Humanity partner families or by volunteering to assist the organization in other ways.
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