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Overview: Sweat Equity Shares

Published on : 03 Jun 2020

Sweat Equity Shares

Sweat equity shares have proven to be a boon to the corporate world by way of promoting healthy competition and serving as a reward for the employees of the company while at the same time furthering the development of the company. Sweat equity shares are shares that are issued at a discounted rate or are offered in exchange for consideration that is other than cash, by the company to the employees or directors for stipulating their expertise and knowledge or on account of rendering available rights in nature of value additions or intellectual property rights. The sweat equity shares can only be issued to the directors or employees of the company and shall only be extended to the ambit of equity shares. Sweat equity shares are issued by the company on the basis of value additions of the employees or directors. Such shares are issued as a reward to the employees by cutting them a discount on such shares or granting such shares in exchange for consideration. For instance, if ‘X’ contributes towards the betterment and welfare of the company by developing a program for carrying out the ease of operations, then a share issued by the company in the name of ‘X’ as a reward for the time, effort and contribution towards the advantage of the company shall be termed as a sweat equity share. It Is the contribution to a task or project that is rewarded by the company for value additions of the employees, where such value additions were to be derived or were derived by the company otherwise from the outside like by an expert or professional. The company issues sweat equity shares to its personnel instead of paying professionals outside for their technical know-how if the same work is done by the employees of the company. Such shares shall be issued by a special resolution of the company. The sweat equity shares can be of great benefit for start-up companies that would lack the financial sources to carry out all activities for the company initially. A start-up would require a great number of funds for various functions and activities of the company. The employees benefit as the reward of such shares would act as a great boost of motivation and also serves as a substitute for monetary benefits to the employees. This helps promote healthy competition in companies as the initial start-up company would otherwise face issues to compete with the market competition in the long term. As for the sweat equity shares in companies that are already established, they shall possess large investments and funds in order to issue such sweat equity shares in the market and get heavy returns which can then be issued to the employees. The sweat equity shares serve as a great way of promoting a healthy work environment and as an incentive besides the essential remuneration. A special procedure would be carried out by the company to issue such shares, and the same can be done by a resolution passed by the general meeting conducted at a company. The majority of votes by the shareholders of the company will have to be in favor of such a resolution for the resolution to be deemed to pass. The employees end up holding the shares partially or fully as pertaining to the investment made by such employees in the company. Certain company targets can also be set up as an option where on completing an agreed task established by the company, the employees shall receive an aggregate of shares in the company.

The following points are essential in the understanding of sweat equity shares in a company: -

  1. Sweat equity shares are issued by the company to the working personnel or directors of the company at a discounted rate or in exchange for consideration other than cash.
  2. The employees in exchange for their contribution to the welfare of the company receive partial or full ownership in the sweat equity shares.
  3. These shares serve as a reward besides the basic remuneration received by employees of the company.
  4. This acts as an incentive and motivation for the employees of the company while at the same time benefitting the company.
  5. The company is also able to achieve the purpose of retaining its employees by such rewards.
  6. The terms and details of the shares issued shall be proposed and discussed via a general meeting in the company.
  7. The employees have the additional motivation, and at the same time, the company benefits, hence, proving to be a two in one situation where two benefits are achieved via sweat equity shares.
  8. Initial start-up companies benefit from such an arrangement to a great extent due to the lack of financial sources as compared to well-established businesses and promote a healthy competitive market.
  9. Such shares can be issued to the employees, directors or promoters of the company.
  10. Sweat equity serves as a non-monetary benefit and comes in the shape of effort, labor and time contributed towards the development and welfare of the company.

It is imperative that a register of such sweat equity shares be maintained that would record the value of such shares being rewarded and the time period pertaining to the particular person being awarded such shares. Any limitations or rights shall also be discussed beforehand and shall be mentioned. The same shall also be discussed and laid down in a general board meeting proposed by the company. The company can provide such equity at a discount for the technical know-how or making any intellectual property rights available. Therefore, the sweat equity shares provide with great benefits for the company and simultaneously its employees.



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