What is Sweat Equity?

Legal Definition
Sweat equity is a party's contribution to a project in the form of effort and toil, 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 with a successful model used by Habitat for Humanity, 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 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 which then provides capital to build homes for other families.

More recently 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). 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.
-- Wikipedia
Legal Definition
1. Increased business worth created b y unpaid mental or physical work of the owner or founder. 2. Increased property value created by work of the owner to enhance looks or amenities. 3. Extra percentage of a company's common stock that is allocated to senior executives as motivation for more hard work ensuring the firm's success.