Sweat Equity
Shares issued to employees or directors at a discount, or for non-cash consideration such as know-how or value addition.
How it is identified
Test: shares are issued to employees or directors for consideration other than cash, or at a discount, under a special resolution
Unit
qualitative
In depth
Sweat equity differs from an employee stock option in that shares are issued directly rather than through a right to buy later, and it can compensate for intellectual property or services rather than for future performance. It requires a special resolution, is subject to limits on the proportion of capital, and carries a lock-in period. Because the consideration may be non-cash, valuation is the point of contention — issuing shares for know-how of disputed worth is a route to dilution without corresponding value. The disclosures required in the annual report are where the terms become visible.
Worked example
Issuing 5 lakh sweat equity shares in a company with 30 crore outstanding dilutes existing holders by 5,00,000 / 30,05,00,000 = 0.17%. Whether the non-cash consideration was worth that is the question the valuation report should answer.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Sweat Equity” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.