Sweat Equity, What Is Sweat Equity?
Sweat equity is a term used to describe the contribution made to a project by people who contribute their time and effort. It can be contrasted with financial equity which is the money contributed towards the project. It is used to refer to a form of compensation by businesses to their owners or employees. The term is sometimes used in partnership agreements where one or more of the partners contributes no financial capital. In the case of a business startup, employees might, upon incorporation, receive stock or stock options in return for working for below-market salaries (or in some cases no salary at all).
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 start-up 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.
The term can also be used to describe the value added to real estate by owners who make improvements by their own toil. The more labor applied to the home, and the greater the resultant increase in value, the more sweat equity that has been used. Some home improvement projects have the potential to create more value than do other projects. Wallpaper, floor coverings and paint can dress up an old residence and make it more appealing to buyers. Improvements to bathrooms and kitchens are the most valuable sources of additional value.
In a successful model used by Habitat for Humanity, families who would otherwise be unable to purchase their own home (because their income level does not allow them to save for a down payment or qualify for an interest-bearing mortgage offered by a financial institution) contribute up to 500 hours of sweat equity to the construction of their own home, the homes of other Habitat for Humanity partner families or by volunteering to assist the organization in other ways. Once moved into their new home, the family makes monthly, interest-free mortgage payments into a revolving "Fund for Humanity" which provides capital to build homes for other partner families.
Sunanda Pushkar controversy
Rendezvous Sports World, part of the consortium that owns Kochi franchise of the Indian Premier League (IPL), may not be technically having the “sweat equity” that they claim to have.
Rendezvous has a 26 per cent stake in the unincorporated joint venture (UJV) that owns Kochi Franchise. Out of this, 25 per cent they claim to have received as “sweat equity” for the management service they would render in running the franchise.
According to the Companies Act, sweat equity is allotted to a person for his contribution of tangible or non-tangible asset to a company. For instance, if a person works for creating patents for a company, then the company can issue equity to him, instead of paying cash. It could be issued for many other things such as providing technical know how, brand or copyright. It is basically issuing share instead of cash for a service provided.
What is unique about Rendezvous is that their “sweat equity” is “undilutable in perpetuity” and it has a lock-in period of just two years.
According to consultancy firm PricewaterhouseCoopers, the Companies Act norms do not make sweat equity “undilutable in perpetuity”. It means when new equity is issued by a company to a third party, then the promoters’ as well as the sweat equity holder’s stake is diluted accordingly. Besides, the lock-in period in the Companies Act is three years.
More than that the Companies Act allows an unlisted company to issue up to 15 per cent, or worth up to Rs 5 crore, in a year under sweat equity allotment. “If the allotment is more than 15 per cent in a year, then it will not be treated as sweat equity, unless the central government approval is taken,” said Joy Jain, executive director at PWC.
Officials at Ministry of Corporate Affairs said they had not received any request for authorising 25 per cent sweat equity allotment.
“There is no clarity in this case as to the terms and conditions that led to the grant of sweat equity. The corporate affairs ministry should clarify, if the current rules under the Companies Law (that binds issue of sweat equity by unlisted companies) has been flouted in this case,” said Manoj Kumar, senior partner, Hammurabi & Solomon, a Delhi-based legal consultancy firm.
There are five other partners in the UJV that owns Kochi franchisee. Out of this, Anchor Earth, Parinee Developers, Film Waves Combines own 27 per cent, 26 per cent and 12 per cent, respectively. While Anand Shyam Estates owns 8 per cent, Vivek Venugopal has 1 per cent. These partners are the financial investors, while Rendezvous will take care of the management.
Meanwhile, Sunanda Pushkar, the woman at the centre of an ownership controversy surrounding the Kochi IPL franchise, is considering filing for damages and has hired a Dubai-based lawyer for the purpose.
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 start-up 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.
The term can also be used to describe the value added to real estate by owners who make improvements by their own toil. The more labor applied to the home, and the greater the resultant increase in value, the more sweat equity that has been used. Some home improvement projects have the potential to create more value than do other projects. Wallpaper, floor coverings and paint can dress up an old residence and make it more appealing to buyers. Improvements to bathrooms and kitchens are the most valuable sources of additional value.
In a successful model used by Habitat for Humanity, families who would otherwise be unable to purchase their own home (because their income level does not allow them to save for a down payment or qualify for an interest-bearing mortgage offered by a financial institution) contribute up to 500 hours of sweat equity to the construction of their own home, the homes of other Habitat for Humanity partner families or by volunteering to assist the organization in other ways. Once moved into their new home, the family makes monthly, interest-free mortgage payments into a revolving "Fund for Humanity" which provides capital to build homes for other partner families.
Sunanda Pushkar controversy
Rendezvous Sports World, part of the consortium that owns Kochi franchise of the Indian Premier League (IPL), may not be technically having the “sweat equity” that they claim to have.
Rendezvous has a 26 per cent stake in the unincorporated joint venture (UJV) that owns Kochi Franchise. Out of this, 25 per cent they claim to have received as “sweat equity” for the management service they would render in running the franchise.
According to the Companies Act, sweat equity is allotted to a person for his contribution of tangible or non-tangible asset to a company. For instance, if a person works for creating patents for a company, then the company can issue equity to him, instead of paying cash. It could be issued for many other things such as providing technical know how, brand or copyright. It is basically issuing share instead of cash for a service provided.
What is unique about Rendezvous is that their “sweat equity” is “undilutable in perpetuity” and it has a lock-in period of just two years.
According to consultancy firm PricewaterhouseCoopers, the Companies Act norms do not make sweat equity “undilutable in perpetuity”. It means when new equity is issued by a company to a third party, then the promoters’ as well as the sweat equity holder’s stake is diluted accordingly. Besides, the lock-in period in the Companies Act is three years.
More than that the Companies Act allows an unlisted company to issue up to 15 per cent, or worth up to Rs 5 crore, in a year under sweat equity allotment. “If the allotment is more than 15 per cent in a year, then it will not be treated as sweat equity, unless the central government approval is taken,” said Joy Jain, executive director at PWC.
Officials at Ministry of Corporate Affairs said they had not received any request for authorising 25 per cent sweat equity allotment.
“There is no clarity in this case as to the terms and conditions that led to the grant of sweat equity. The corporate affairs ministry should clarify, if the current rules under the Companies Law (that binds issue of sweat equity by unlisted companies) has been flouted in this case,” said Manoj Kumar, senior partner, Hammurabi & Solomon, a Delhi-based legal consultancy firm.
There are five other partners in the UJV that owns Kochi franchisee. Out of this, Anchor Earth, Parinee Developers, Film Waves Combines own 27 per cent, 26 per cent and 12 per cent, respectively. While Anand Shyam Estates owns 8 per cent, Vivek Venugopal has 1 per cent. These partners are the financial investors, while Rendezvous will take care of the management.
Meanwhile, Sunanda Pushkar, the woman at the centre of an ownership controversy surrounding the Kochi IPL franchise, is considering filing for damages and has hired a Dubai-based lawyer for the purpose.
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