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Sweat equity is a party's contribution to a project in the form of labor, as opposed to financial equity such as paying others to perform the task. Sweat equity has an application in business, for example, where the owners put in effort and toil to build the business, in real estate where owners can do D.I.Y. improvements and increase the value of the real estate, and in other areas such as an auto owner putting in their own effort and toil to increase the value of the vehicle The term sweat equity explains the fact that value added to someone's own house by unpaid work results in measurable market rate value increase in house price. The more labor applied to the home, and the greater the resultant increase in value, the more sweat equity has been used. The concept of sweat equity was first employed in the United States by the American Friends Service Committee in the Penn Craft self-help housing project beginning in 1937. The AFSC began using the term in the 1950s when helping migrant farmers in California to build their own homes. It is perhaps most popularly associated today with a successful model used by Habitat for Humanity, in which families who would otherwise be unable to purchase a home contribute sweat equity hours to the construction of their own home, the homes of other Habitat for Humanity
Habitat for Humanity
partner families, or by volunteering to assist the organization in other ways. Once living in their new home, the family then make interest-free mortgage payments into a revolving fund[1] which then provides capital to build homes for other families. More recently in business, sweat equity has been used to describe a party's contribution to a project in the form of effort, as opposed to financial equity, which is a contribution in the form of capital. In a partnership, some partners may contribute to the firm only capital and others only sweat equity. Similarly, in a startup company formed as a corporation, employees may receive stock or stock options, becoming thus part-owners of the firm, in return for accepting salaries that are below their respective market values (this includes zero wages).[2] The term used to refer to a form of compensation by businesses to their owners or employees. The term is sometimes used to describe the efforts put into a start-up company by the founders in exchange for ownership shares of the company. This concept, also called "stock for services" and sometimes "equity compensation" or "sweat equity", can also be seen when startup companies use their shares of stock to entice service providers to provide necessary corporate services in exchange for a discount or for deferring service fees until a later date, see e.g. "Idea Makers and Idea Brokers in High Technology Entrepreneurship" by Todd L. Juneau et al., Greenwood Press, 2003, which describes equity for service programs involving patent lawyers and securities lawyers who specialize in start-up companies as clients. See also[edit]

To each according to his contribution

References[edit]

^ Habitat for Humanity, International. "Fund for Humanity".  ^ Grow Venture Community

External links[edit]

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Private equity
Private equity
and venture capital

Basic investment types

Buyout Venture Mezzanine Growth Secondaries Equity co-investment

History

History of private equity and venture capital Early history of private equity Private equity
Private equity
in the 1980s Private equity
Private equity
in the 1990s Private equity
Private equity
in the 2000s

Terms and concepts

Buyout

Financial sponsor Management buyout Divisional buyout Buy–sell agreement Leveraged recapitalization Dividend recapitalization

Venture

Angel investor Business
Business
incubator Post-money valuation Pre-money valuation Seed money Startup company Venture capital
Venture capital
financing Venture debt Venture round

Structure

Private equity
Private equity
firms and funds Limited partnership Limited liability company Carried interest Management fee Publicly traded private equity

Business
Business
Development Company Venture capital
Venture capital
trust

Private investment in public equity (PIPE) Pledge fund

Investors

Corporations Institutional investors Pension funds Insurance companies Fund of funds Endowments Foundations Investment banks Merchant banks Commercial banks High-net-worth individuals Family offices Sovereign wealth funds Crowdfunding

Related financial terms

AUM Cap table Capital call Capital commitment Capital structure Distribution waterfall EBITDA Envy ratio High-yield debt IPO IRR Leverage Liquidation preference M&A PME Taxation of private equity and hedge funds Undercapitalization Vintage year

Private equity
Private equity
and venture capital investors Private equity
Private equity
firms Venture capital
Venture capital
firms Angel investors P

.