Sweat Equity Joint Ventures Agreements

by Jayne Thompson

Establishing a joint venture, or JV, enables two individuals or businesses to work together to achieve a common goal. The JV achieves efficiency by sharing know-how and resources. In traditional joint ventures, each party puts up capital, property or resources to achieve the project. With a sweat equity agreement, one or more of the parties instead pledges the value of his work.

Sweat as a Business Asset

While JV partners may allocate profit in any manner they think fit, profit share is typically a product of the project's success and the front end capital input of the parties. You can value most resources, such as production capacity, against traditional financial metrics. To add probity, you must also value the specific skills or expertise that one party can bring to the project -- the sweat equity. If one JV partner commits resources worth $50,000 toward a project, he wants to know that his partner is obliged to provide work of equivalent value.

Sweat in Dollars

The value of sweat equity is negotiable, and the parties can agree to whatever valuation methods they wish. One approach ascribes a figure based on forgone wages during the project, though this simplistic approach does not take into account the sweat equity partner's distinctive contribution or his risk. Some partnerships allocate a premium over market wages to account for such intangibles.

Extracting the Sweat From the Equity

If you're establishing a JV, you'll typically allocate duties and responsibilities to the respective partners. To extract the full capital value of the contributed labor, you'll need to place the sweat equity partner under additional duties to, for example, contribute a certain number of hours or exploit his personal contacts. You'll also want to assess his sweat equity input against tightly drawn performance criteria to ensure that the partner is not committing a resource he cannot live up to.

Written in Sweat

Conflicts are a common side effect of joint venture arrangements. Draft the sweat equity partner's duties into a formal JV agreement to avoid disputes. Document the capital infusion in the agreement, including the value of the sweat equity. Identify and limit the purpose of your venture. Spell out each partner's interest in the gross profits and losses. Some states have JV licensing requirements that you'll need to attend to before you begin operating under the JV.

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