If you’re running a startup, you might be thinking of some options that could save you some financial stress. For example, is there another way you can ‘pay’ your employees if you don’t have enough cash?
This is where startups would turn to a Sweat Equity Agreement. When a company can’t exactly afford to pay their employees in cash, they can offer them ownership in the form of shares.
This way, the employees will receive shares of the company as compensation for their labour (hence the term ‘sweat’).
However, it isn’t always that simple. It can get tricky if the person is an employee and is therefore entitled to minimum wage under the National Employment Standards. This means you can’t exactly pay them in shares alone.
But before we break things down, let’s look at what a Sweat Equity Agreement is all about.
What Does A Sweat Equity Agreement Cover?
As a founder, you could offer shares to practically anyone, and however much you want.
A Sweat Equity Agreement should cover the details of how the shares will be distributed and to who. For example, it should disclose how much equity or shares they are willing to offer. It should also specify:
- The type of shares
- At what rate the work will be converted to equity
- The specific services the employee will perform
Another important detail is a vesting provision. If the employees will receive shares, a vesting provision will outline whether these shares will be awarded on an incremental basis, or whenever certain tasks have been completed (known as milestones). We’ve written more about this here.
Before You Create A Sweat Equity Agreement…
Opting for a Sweat Equity Agreement may be a simple decision, but you need to carefully consider the people you’re offering it to.
It’s important not to throw shares around here and there. You’re trusting people with ownership of the company you’re building, so you want these people to be responsible with their choices.
This means it’d be best to choose employees whose goals align with those of the business. In other words, you need to be confident that the employee is motivated to increase the business’ value and will produce outstanding results.
What About Minimum Wage?
Under the National Employment Standards, all employees in Australia are entitled to minimum wage. So if you’re setting up a Sweat Equity Agreement with one of your employees, this doesn’t necessarily mean you can avoid paying them.
It’s important to note that you could be breaking the law by not paying your employees minimum wage, even if a Sweat Equity Agreement is in place. In other words, the Agreement does not override the National Employment Standards.
If the person receiving shares is not an employee (e.g. an investor), the National Employment Standards do not apply and a Sweat Equity Agreement alone is acceptable.
Essentially, the main three questions you should ask yourself are:
- Are they an employee?
- Are they under an award? (If so, minimum wage does not apply)
- What are their specific legal entitlements?
Put simply, unless an employee is under an award, they are entitled to minimum wage (in addition to their Sweat Equity Agreement).
It’s even more important to consider minimum wage entitlements if you’re still not sure of the value of the shares being offered.
This area of employment law can get a bit tricky – you don’t want to accidentally break the law. So, it’s a good idea to speak to a lawyer to avoid any headaches down the track.
What Documents Do I Need?
If you’ve decided to go ahead with a Sweat Equity Agreement, you might also need to prepare a Shareholders Agreement.
A Shareholders Agreement should cover some of the following things:
- How many shareholders are there?
- What proportion of shares are they holding?
- What happens if a shareholder wants to leave?
- What happens if there is a dispute?
Put simply, a Shareholders Agreement governs the relationship between the company and its shareholders (in this case, employees), and covers all the ‘what if’s.’
You might need to add some extra details in your Agreement depending on your particular company and how things usually run, so it’s a good idea to have one drafted by a lawyer.
It’s also good business practice to include the details of a Sweat Equity Arrangement in your Employment Contracts. This should set out how the payment of shares will work with the employee’s minimum wage entitlements.
Where Do I Start?
A Sweat Equity Agreement can minimise your startup’s financial stress, but you need to carefully consider all your employer obligations. The best way to ensure you’ve covered everything is to talk to a lawyer before setting it up.
Sprintlaw has a team of experienced lawyers who can help you manage these risks during your business journey.
Feel free to reach out to us at email@example.com or contact us on 1800 730 617 for an obligation-free chat.
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