Definition of Sweat Equity

What is "sweat equity"? What is the definition of the term "sweat equity"?

"Sweat equity" refers to the value that is created in a business by the hard work of an owner or owners.

Definition of Sweat Equity - IllustrationFor instance - two young businessmen decide to open up a computer consulting business. These two men do not have any extra money for advertising - instead, they rely entirely on cold calls and extremely hard work to build up their client list and business. The two owners pride themselves on being available for their customers 24/7, regardless of how many sleepless nights they have to endure.

After a few years of extremely hard work, the two owners decide to sell to a larger consulting company for $3 million. The equity in their company was created almost entirely through the hard work of the owners. This equity is called "sweat" equity because it was created through the sweat (hard work) of the two owners.

Newer companies usually have to rely on "sweat equity" in order to get off the company off the ground, due to usually not being able to access funds to hire employees, etc.

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