Thoughts on startups by investors that
fund them & entrepreneurs that run them

What is the ratio of equity received for sweat equity vs. cash investment in a new venture?

There is no specific ratio between “sweat equity” and cash in a venture, and that’s actually not a good way to think about the issue. The bottom line is that cash is cash is cash, and everything else is “not cash”. The reason is that cash is fungible, which means it can be interchanged for everything else, from programming skills to vacations on the Riviera. Other things, such as your particular time and effort, are not.

A better way to think about this is to separate two aspects of the “sweat” that one puts into a new venture. These are critically different, and have very different economic attributes attached to them.

The first is the entrepreneurial value of the founder(s) in a new venture. This is what happens when someone starts an enterprise and creates something of value. So if you start a company, and then raise a round of angel investment at, say, a $2,000,000 valuation, the entrepreneurial value of the time and effort it took you to get to that point is…$2,000,000. The point is that the value created has absolutely nothing to do with a quantified effort that it took to get there. You might have created that value by slaving 18 hours a day, seven days a week for five years (in which case the value of the sweat equity is $8.70 per hour), or you might have created that value by having a brilliant concept, execution plan and team that you pulled together in two weeks of leisurely work (in which case the value of the sweat equity is $25,000 per hour).

The second component is the replacement cost of the specific skills and effort that are involved in the particular work. So if the same specific tasks could have been achieved by paying a programmer (or marketer or part-time CFO), say $2,000 on a short term contract, then that is exactly what the replacement cost value of the work would be.

In practice, once a company has been funded and a valuation established, “sweat equity” contributed after that point is usually compensated based on only the replacement cost number, either 1:1 (that is, the nominal salary, what you would have been paid if the cash had been on hand) is simply accrued, or some other ratio (say, 25% or 50% extra), in recognition of the fact that you’re willing to take the risk that it will never be paid if things don’t work out.

*original post can be found on Quora @ : *

Written by David S. Rose

user David S. Rose Founder and CEO,

David has been described as "the Father of Angel Investing in New York" by Crain's New York Business, & a "world conquering entrepreneur" by BusinessWeek. He is a serial entrepreneur & Inc 500 CEO who chairs New York Angels, one of the most active angel investment groups. David is also CEO of Gust.

prev next

You might also be interested in

The Discipline of Execution Defines an Entrepreneur

When entrepreneurs come to me with that “million dollar idea,” I have to tell them that an idea alone is really worth nothing. It’s all about the execution, and investors invest in the people who can execute, or even better, have a history of successful execution. Execution is making things happen, and for startups it usually means making change happen,

Read more >

10 Incentives For Entrepreneurs To Bootstrap Their Startup

Image via Pixabay

I’ve always wondered who started the urban myth that the best way to start a company is to come up with a great idea, and then find some professional investors to give you a pot of money to build a company. In my experience, that’s actually the worst way to start, for reasons I will outline here,

Read more >

7 Elements Of Inspiration From The Steve Jobs Model

Quote from Steve Jobs via Flickr

Steve Jobs was one of those entrepreneurs who seemed universally either loved or hated, but not many will argue with his ability to innovate in the technology product arena over the years. He was instrumental in creating Apple, which has pioneered a dazzling array of new products, and even surpassed Microsoft, to become the

Read more >

The Right Startup Advisors Are As Valuable As Money

Warren Buffett advises President Obama, image via Wikipedia

If you are a new entrepreneur, or entering a new business area, it’s always worth your time to assemble an Advisory Board of two or three executives who have travelled that road before. You need them before you need funding, and if you select the wrong people, or use them incorrectly, no

Read more >

Surround Yourself With People Smarter Than You

Einstein image via Flickr by Sebastian Niedlich

Helpers do what you say, while good help does what you need, without you saying anything. People who can help you the most are actually smarter than you, at least in their domain. Top entrepreneurs spend more time putting the right team in place to accomplish their objectives than they spend on any

Read more >