Click to Print

What is sweat equity and how does it work?

My husband has recently started a new job where the salary is $50,000; however, he only takes home $25,000. The other half is going into sweat equity. Is this a normal practice and how might my husband benefit from this?
Nina Kaufman answered February 3, 2009
URL: http://www.entrepreneur.com/answer/221841
"Sweat equity" is the term usually given to the time and effort a cash-strapped entrepreneur puts into a business in order to earn his/her ownership share -- as opposed to contributing money for it. It's not a term that you usually associate with an employee. Employees are paid a salary for the work they put in -- they generally don't have any "equity" (ownership) rights in the company.

If your husband is truly an employee, he should be receiving his full salary, less any legal deductions for taxes, Medicare, etc. If he isn't, there had better be a r-e-a-l-l-y good reason for it, like contributing to the employer's stock option plan.

But even those can be risky if he works for a privately-held company. You and your husband (together) should speak to your financial advisor and an employment attorney to make sure this arrangement is on the up-and-up.

Nina L. Kaufman, Esq. is an award-winning New York City attorney, edutainer and author. Under her Ask The Business Lawyer brand, she reaches thousands of entrepreneurs and small business owners with her legal services, professional speaking, information products, and LexAppeal weekly ezine. She also writes the Making It Legal blog.