The Value of Your Labor: Sweat Equity
“My partner put up $10,000 and I worked for a year getting the business going. I always thought we were equal partners. My partner says sweat equity isn’t worth the same as real money. Is that true?”
Chris Reich provides business partnership advice.
You Answer Is NO, but It Might Depend On….
When people work for free or for a greatly reduced amount, it is said they are contributing their sweat to the business. This is commonly referred to as “sweat equity”. Sweat equity can be worth more or less than cash depending upon your agreement. If you agreed that $10,000 is equal to a year of your work, then it is. If there never was an agreement, it could be hard to enforce.
The courts will honor verbal agreements if the is some substantiating evidence that there was an agreement. If we use the “reasonable person” test, we ask, “would a reasonable person work for free for an entire year just to get a 10% stake in a liquor store if the total capital investment is only $10,000?” Probably not. There aren’t many jobs that pay $10,000 a year. So you’d have a decent claim to being a equal partner. Any reasonable person would agree.
Now consider this case. Jill puts up $500,000 to start a medical device company. Jim, who has no experience in that industry but does know how to create a website and use social media, works for a year without pay. He creates a nice website and builds a 200 follower Facebook page. Jill and Jim get in an argument because Jim wants an equal share in the business. Would a reasonable person think a website and 200 Facebook followers is worth $500,000? Probably not.
The Agreement Is Important
In both cases, having a written agreement would easily solve the matter. Though Jill’s large cash contribution is hard to match with labor, the value of Jim’s labor could be determined by a written agreement. If Jill agrees that Jim’s work is worth an equal share, it is. End of discussion. We don’t know all the details. Perhaps Jim brings other talents to the business that Jill will need later. Jill might just need Jim’s support. If there is an agreement, it’s not for us to judge it.
What About You?
If you’re getting into business with someone and the upfront cash contributions are different, draft an agreement stating each party’s contribution and the percentages of ownership in the business of each partner. That protects everyone and can save a lot of grief. If you’re not sure about how to draft the agreement, call me. We can put it together in an hour.
More Partnership Questions?
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