
This can be an easy win for companies that are tight for cash, but it can give rise to problems, if it is not properly thought through.
What is meant by sweat equity? Sweat equity is a clever method used to exchange your shares in the company to pay for products, services or expertise from suppliers, key employees and contractors. It kills two birds with one stone: by paying for services in sweat equity the company has raised investment from its suppliers, and it owes nothing to the provider who is being paid by equity shares. It feels entrepreneurial and collaborative, so what’s not to like? The first issue that must be addressed is what value you attach to the shares. This value is calculated by multiplying the price of the shares by the number of shares – that’s the easy part. The hard part is determining what price the shares should be valued at and the good news is that there are definite rules that come into play here to assist you. The golden rule is that you must value the shares with reference to the latest market value. This can be, for example, based on the price that you last sold some shares, provided that it wasn’t too long ago! Ideally you need to have sold shares within three months of the invoice date. However if there were no transactions, then you will have to justify the valuation using profit forecasts, but you must be careful to ensure that any shares sold later on are valued with relevance to the share price you valued in this transaction. Valuation can become complex if there are no recent transactions to refer to and this is where you may need to bring in your accountant.- Family office interest in private equity funds grows
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If the service performed by the supplier is poor, it can be more difficult to resolve if the supplier is also a shareholder as well as your key supplier.
- Properly value the equity they are agreeing to exchange and get proper advice;
- Ensure the equity is properly recorded in the company’s books so everyone is aware that equity was issued; and
- Ensure that the supplier’s service consistently meets expectations before agreeing to pay them through equity.
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