TL;DR
A sweat equity agreement is a contract that gives someone shares in your company in exchange for work instead of money. For a founder without cash, it looks like the cheapest way to get a first version built. It is usually the most expensive: the equity you hand over for 200 hours of work today is worth ten to fifty times the cash rate once the company has a valuation, and it is permanent.
If you do use one, it needs eight things or it will hurt you later: a defined scope with acceptance criteria, a stated value for the equity, vesting with a cliff or milestones, what happens when the person leaves, an IP assignment, confidentiality, the tax position, and the shareholder terms the shares are subject to. The template below has all eight, with a worked example. And if what you actually need is the first version built, we build a working prototype for $350 in 7 days, and you keep the shares.
Key Takeaways
- Sweat equity is payment, not partnership. A co-founder gets a near-equal stake for sharing the whole risk; a contributor gets a small stake for defined work. Different documents, different numbers. The co-founder version is in how much equity a technical co-founder gets.
- Price the work in cash first, then convert. 200 hours at $100 an hour is $20,000. At a $500,000 valuation that is 4%. Write both numbers down; the agreement should state them.
- Vest it. Time-based with a cliff, or milestone-based tied to acceptance of deliverables. Unvested shares are forfeited if the person stops.
- Leaver terms decide everything. Who can buy the shares back, at what price, and for how long after the person leaves. Without this clause, a developer who quits after three weeks keeps their stake forever.
- IP assignment or nothing. If the agreement does not assign the code to the company, the company may not own its own product. Investors check this.
- It is taxable. In the US, property received for services is income at fair market value (IRS Publication 525); a Section 83(b) election within 30 days of the grant changes when that tax lands (26 U.S.C. 83(b)). Other countries differ. Get advice before signing, not after.
- Compare it with paying. A working prototype costs $350 and a week. Four percent of a company that later raises at $5 million is $200,000. The template’s Schedule B does this arithmetic for your numbers.
What a sweat equity agreement is
Sweat equity is ownership earned through work rather than bought with cash. A sweat equity agreement is the contract that sets the terms: what work, how much equity, when it vests, what happens if the person leaves, and who owns what they make.
It sits between two documents founders know better. A co-founder agreement splits a company between partners who share the whole risk, usually near-equally, over years. An employment agreement with options pays a salary and adds a small grant that vests over time. A sweat equity agreement is for the case in the middle: someone who is not a founder and is not being paid, doing a defined piece of work, most often a developer building the first version of a product for a non-technical founder.
That is the case this post is written for. If you are splitting a company with a partner, read the technical co-founder equity guide instead; if you are deciding between a co-founder and a hire, start with founding engineer vs technical co-founder.
When founders use one, and what it actually costs
The typical moment: you have an idea, no money, and a developer friend or a freelancer who says “I’ll build it for a piece of the company.” It feels free. It is the opposite.
Here is the arithmetic, with round numbers you can swap for your own.
| Cash | Sweat equity | |
|---|---|---|
| Work | 200 hours, senior developer | 200 hours, senior developer |
| Price today | $20,000 at $100 an hour, or $350 for a fixed-price prototype | 4% of a company you value at $500,000 today |
| Price after a $5M seed round | The same $20,000 | $200,000 before dilution, and the shares are still there after the next round too |
| If the developer leaves halfway | You stop paying | You need a leaver clause, or they keep what has vested |
| If the product pivots | The code was still paid for | The equity was for a product that no longer exists |
Equity is the most expensive currency a startup has, because its price rises with every success. Paying for the first version in it means the first version is the priciest thing you will ever buy. Founders do it anyway when the alternative is not building at all, which is a real situation, and this post is about doing it properly rather than not doing it. But note the third row: the fixed-price route is $350 for a working prototype, which is less than the lawyer’s fee for reviewing the sweat equity agreement.
The eight clauses a sweat equity agreement needs
Most templates on the first page of Google have three or four of these. The ones missing are the ones that cause disputes.
1. Scope and acceptance criteria
“Build the app” is not a scope. The agreement, or a schedule attached to it, should list the deliverables, what “done” means for each one in terms a non-technical founder can check (runs on a public URL, a real user can complete the core action, code is in the company’s repository), and dates. Without acceptance criteria, the argument about whether the work was finished becomes an argument about whether the equity was earned.
2. The grant, and its stated value
The number of shares or units, the percentage of fully diluted equity that represents on the date of signing, and the fair market value the parties are using. Stating the value matters for tax (below) and for the conversation you will have with the developer later, when the company is worth more and they wish they had asked for more. It also makes dilution explicit: the agreement should say the percentage is as of today and will be diluted by future rounds and an option pool, because it will.
3. Vesting
Two honest ways to do it. Time-based, the standard for employees and co-founders: four years, a one-year cliff, monthly afterwards. Milestone-based, which fits a defined build better: a slice on the prototype, a slice on the working version, the balance on handover. Milestone vesting ties the equity to the deliverables in clause 1, so an unfinished build is an unvested grant. Whichever you choose, unvested shares are forfeited when the work stops.
4. Leaver terms
The clause most templates skip and the one most likely to be used. It answers: when the person stops working, what happens to the vested shares? The common structure is a company repurchase right, at fair market value if the company ends the relationship without cause, and at the lower of fair market value and what the person paid (usually nothing) if they walk out or are removed for cause. It should also say how long the company has to exercise the right, typically 60 to 90 days, because an open-ended right is unenforceable in practice.
5. Intellectual property assignment
The company must own the code. Not license it, not share it: own it, from the moment it is written. Investors’ lawyers check this in every diligence; a missing IP assignment on the person who built the first version is a deal-stopper, and getting a signature from someone who left on bad terms two years ago is not fun. The clause should also cover pre-existing material the developer brings in (licensed to the company, listed in a schedule) and open-source components (allowed, under licences that permit commercial use, listed). More on why this matters in how to protect your app idea.
6. Confidentiality
Standard, short, and it should survive the end of the agreement. The developer will see the product, the customers and the plan.
7. Tax
Receiving equity for services is generally taxable as compensation. In the United States, property received for services is included in income at its fair market value (IRS Publication 525, “Restricted Property”), and where the shares are subject to vesting, the person can elect under Section 83(b) to be taxed on the value at grant rather than as each tranche vests, provided the election is filed within 30 days of the transfer. When the grant is small and the company is worth little, that election usually saves a great deal of tax later; miss the 30 days and it is gone. Other countries have their own versions of the same problem. The agreement should say that the contributor has had the chance to take advice, and that the company makes no representation about tax. The contributor should actually take the advice.
8. Shareholder terms
The shares come with the company’s constitution attached: the articles or bylaws, the operating agreement if it is an LLC, any shareholders’ agreement, and the drag-along, tag-along and transfer restrictions in them. The agreement should say the contributor has received these and is bound by them. For an LLC specifically, the operating agreement may need amending to admit a new member, and units for services can have their own tax treatment (profits interests), which is a lawyer question, not a template question.
A filled-in example
The template’s Schedule B walks through this; here is the shape of it.
| Term | Example |
|---|---|
| Work | First working version of a web product: prototype, working version with real accounts and data, handover. 200 hours estimated. |
| Cash value of the work | $20,000 (200 hours at $100) |
| Company value used | $500,000, founder’s good-faith estimate, no priced round |
| Grant | 4.0% of fully diluted equity, common stock |
| Vesting | Milestone: 1.0% on prototype acceptance, 2.0% on working version, 1.0% on handover |
| Leaver | Unvested forfeited; vested repurchasable at FMV (company ends without cause) or at cost (contributor leaves or cause); 90 days to exercise |
| IP | Assigned to the company on creation; open-source components listed; no pre-existing material |
| Tax | 83(b) election filed within 30 days of the first tranche; contributor took advice |
| Acceleration | 50% of unvested on a sale of the company |
What this example is worth to the developer if the company later raises at $5 million: $200,000 before dilution, for $20,000 of work. What it is worth if the company fails: nothing, and 200 hours. Both parties should sign with both outcomes in mind.
How to set one up, step by step
- Write the scope first, before any number. Deliverables, acceptance criteria, dates. If you cannot write this, you are not ready to give equity for it. Our MVP requirements document guide is the same exercise.
- Price the work in cash. Hours times a market rate. This is the number the equity has to be worth to be fair to both sides.
- Pick a company value and say where it came from. A priced round if you have one; otherwise a documented good-faith estimate. Do not skip this; it drives the tax and the percentage.
- Convert to a percentage, and check it against the co-founder scale. If the number you land on is 20% or more, you are not doing a sweat equity deal, you are taking a co-founder, and the co-founder equity guide applies.
- Choose vesting: milestone for a defined build, time-based for an ongoing role.
- Fill in the template, including the leaver terms and the IP assignment. Do not delete clauses you do not understand; ask.
- Have a lawyer in your jurisdiction review it. For a US corporation this is a few hundred dollars; for an LLC it may be more because the operating agreement is involved.
- Issue the shares properly (board consent, cap table updated, share certificate or ledger entry) and file the tax election within the deadline.
Common mistakes
- No acceptance criteria. The work is “done” when the developer says so, and the equity vests.
- No leaver clause. The developer leaves after the prototype and keeps 4% forever.
- No IP assignment. The company does not own its product. Discovered in due diligence, at the worst time.
- Unstated value. Nobody agreed what the shares were worth, so nobody can file the tax election correctly, and the developer’s later “I was underpaid” has no anchor.
- Percentages that were really a co-founder deal. 15% for a build is not sweat equity; it is a partner you have not vetted. See how to find a technical co-founder for how that decision should actually be made.
- Using it because it feels free. It is the most expensive way to pay. Make the trade knowingly or do not make it.
The template
Sweat equity agreement template (.docx)
Word document, bracketed fields, ready for a lawyer’s review. Leave your email and the link appears here and in your inbox.
- Twelve clauses: scope, grant and value, vesting, leaver terms, IP, confidentiality, tax, shareholder terms
- Schedule A: deliverables with acceptance criteria, filled-in example
- Schedule B: the worked example with your numbers to swap in
- Not legal advice on page one, so your lawyer starts from a full draft
What is in it: Twelve clauses covering everything above, a schedule for the deliverables with an example filled in, a worked example of the numbers, and a schedule for pre-existing material. Bracketed fields for everything that changes. Page one says what this paragraph says: it is a starting point, not legal advice, and a lawyer in your jurisdiction should review the completed version before anyone signs.
It is written for a corporation issuing common stock to a contributor. For an LLC, the same clauses apply but the operating agreement governs how a new member is admitted, so the lawyer review is not optional.
The alternative: pay for the first version and keep the shares
Every founder reading this has the same underlying problem: no product, no money for a team, and a developer who will take equity. The sweat equity agreement is one answer. The other is that the first version does not have to cost $20,000 or 4%.
We build a working AI prototype of your idea, on a real URL you can put in front of users and investors, for $350 in 7 days, and an investor-ready MVP in 21. Fixed price, scope agreed in writing first, the code assigned to you the way clause 5 above says it should be. It is what our MVP development contract guide describes, with the number filled in. The trade is not “equity or nothing”; it is “4% of the company, or the price of a lawyer’s hour”. Then go and find your technical co-founder or CTO with a live product in hand, which is the strongest position to do it from.
Related guides
- How much equity should a technical co-founder get?: the partner version of this question
- How to find a technical co-founder or CTO: when the answer is a partner, not a contractor
- Founding engineer vs technical co-founder: the two roles a first technical hire can be
- What is a fractional CTO?: senior direction paid in cash, no equity at all
- MVP development contract: the cash version of this agreement
- How to protect your app idea: IP, NDAs and what actually protects you
Frequently Asked Questions
What is a sweat equity agreement?
A sweat equity agreement is a contract that gives a person shares in a company in exchange for work rather than money. It sets out the work, the amount of equity, how and when it vests, what happens if the person leaves, and confirms that the company owns what they create. It is typically used when a founder has no cash and a developer or other contributor agrees to be paid in ownership.
Is there a free sweat equity agreement template?
Yes. The template on this page is a free .docx with twelve clauses: scope and acceptance criteria, the grant and its stated value, vesting, leaver terms, IP assignment, confidentiality, tax, shareholder terms, relationship of the parties, term, and general terms, plus schedules for deliverables and a worked example. It is a starting point for a lawyer’s review, not a substitute for one.
How do you set up a sweat equity agreement?
Write the scope with acceptance criteria first, price the work in cash, pick a company valuation and record where it came from, convert the cash value to a percentage, choose milestone or time-based vesting, fill in the template including leaver and IP terms, have a lawyer in your jurisdiction review it, then issue the shares formally and file any tax election within its deadline.
Is sweat equity taxable?
Generally yes. In the United States, property received in exchange for services is included in income at its fair market value under IRS Publication 525 and Section 83 of the Internal Revenue Code. Where shares vest over time, a Section 83(b) election filed within 30 days of the grant lets the recipient be taxed on the value at grant instead of at each vesting date. Rules differ by country; take advice before signing.
How much equity should I give a developer to build my MVP?
Price the work in cash, divide by the company’s value, and that is the fair percentage: 200 hours at $100 an hour is $20,000, which is 4% of a $500,000 company. If the number comes out at 20% or more, you are describing a co-founder, not a contractor, and a different agreement applies. Compare it with paying: a working prototype at a fixed price is $350 and leaves the equity untouched.
What is the difference between sweat equity and a co-founder’s equity?
A co-founder’s equity is a large, near-equal stake for sharing the entire risk of the company over years, vested over four years with a cliff. Sweat equity is a smaller stake given to a contributor for a defined piece of work, often milestone-vested and with terms for what happens when the work ends. The first is a partnership; the second is payment.
Can an LLC use a sweat equity agreement?
Yes, but the operating agreement governs how a new member is admitted and what their units carry, and units issued for services can be structured as profits interests with their own tax treatment. The clauses in the template still apply; the LLC paperwork around them needs a lawyer.
Do I need a lawyer for a sweat equity agreement?
For the review, yes. Equity is permanent, it is taxed, and the leaver and IP clauses are the ones that end up in disputes. The template gets you to a complete first draft so the lawyer’s time goes on your specifics rather than on drafting from nothing; for a US corporation that review is typically a few hundred dollars.
Sources and references
- IRS Publication 525, Taxable and Nontaxable Income: restricted property received for services
- 26 U.S. Code 83: property transferred in connection with performance of services, including the 83(b) election and its 30-day deadline
- Cake Equity: sweat equity guide
- Eqvista: sweat equity agreement
- Index Ventures, Rewarding Talent: option grants at seed
Template and worked example prepared 21 September 2026. Not legal advice.
