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If you’re running a startup in 2025, you might be exploring innovative options to ease financial stress. For instance, is there another way to ‘pay’ your team if cash is tight?
This is where startups often turn to a Sweat Equity Agreement. When your company can’t afford to pay its employees entirely in cash, you may offer them ownership in the form of shares as part of their compensation package.
This approach means that employees receive shares of the company in exchange for their hard work – hence the term ‘sweat’ equity.
However, it isn’t always that straightforward. The situation can become complex if the individual is an employee under the National Employment Standards, which guarantee minimum wage and other entitlements. You can’t simply substitute cash with shares alone when the law mandates direct monetary compensation.
Before we delve deeper, let’s review what a Sweat Equity Agreement entails in today’s legal landscape.
What Does A Sweat Equity Agreement Cover?
As a founder, you have the flexibility to offer shares to a range of contributors, but it’s crucial that the agreement clearly outlines the specifics of the equity arrangement.
A Sweat Equity Agreement should detail how shares are to be distributed and to whom. For instance, it should specify the amount of equity being offered along with key terms such as:
- The type of shares being offered
- The conversion rate of work into equity
- The specific services or milestones that trigger the vesting of shares
- Terms regarding termination of the agreement
Another essential element is the vesting provision. This clause outlines whether shares are awarded incrementally over time or upon the completion of specific milestones. We’ve updated our insights on this in our recent article on sweat equity and minimum wage considerations for 2025.
Before You Create A Sweat Equity Agreement…
Opting for a Sweat Equity Agreement may seem like a simple solution, but it’s important to carefully consider whom you’re offering it to.
It isn’t advisable to distribute shares indiscriminately. When you grant ownership in your company, you’re entrusting individuals with a stake in the business’s future. Therefore, you should offer this option only to team members whose goals and values align with the company’s vision. For more guidance on selecting the right partners, have a look at our insights on startup founder contracts.
This means choosing employees who are genuinely motivated to drive the business’s success and contribute significantly to its growth.
What About Minimum Wage?
Under the National Employment Standards, all employees in Australia are entitled to receive at least the minimum wage. In 2025, these standards continue to ensure fair remuneration, meaning you cannot solely compensate an employee with shares if their role requires a minimum cash wage.
Be aware that relying solely on a Sweat Equity Agreement without meeting minimum wage requirements is against the law. The Agreement does not replace your obligation to comply with contemporary wage laws.
If the recipient of shares is not an employee – for example, if they are an investor or consultant – then the National Employment Standards do not apply, and a Sweat Equity Agreement on its own may be acceptable.
Essentially, ask yourself three key questions:
- Is the individual classified as an employee?
- Are they covered by an award? (If so, minimum wage provisions must still be met)
- What are their specific legal entitlements?
Simply put, unless an employee is covered by specific award conditions, they are entitled to receive a minimum wage in addition to any equity-based compensation.
It’s especially important to assess these wage obligations if you’re uncertain about the valuation of the shares being offered. Ensuring compliance with both employment law and your internal compensation policies is imperative as we progress through 2025.
This aspect of employment law can be complex – you definitely don’t want to inadvertently breach legal requirements. For additional peace of mind, consider utilising our contract review services to ensure your agreements meet the latest legal standards.
What Documents Do I Need?
If you decide to implement a Sweat Equity Agreement, you may also need to draft a Shareholders Agreement to outline the broader framework of share distribution.
A Shareholders Agreement should cover details such as:
- The total number of shareholders involved
- The proportion of shares held by each party
- Procedures if a shareholder wishes to exit
- Processes for resolving disputes among shareholders
In essence, a Shareholders Agreement governs the relationship between the company and its shareholders – in this case, the employees – and addresses potential ‘what if’ scenarios. For further details on securing your business interests, refer to our guide on employment contracts.
Depending on your startup’s structure and internal practices, you might want to include specific provisions in your Sweat Equity and Shareholders Agreements. It’s always a sound strategy to have these documents bespoke drafted by a lawyer, ensuring they comply with the most current legal requirements in 2025.
Additionally, it’s good business practice to consider your overall company structure before finalising any equity arrangements. Whether you’re operating as a sole trader – check out our advice on operating as a sole trader – or have incorporated your business, the method of share distribution can have long-term implications. Ensuring that all aspects of your compensation structure, including any Sweat Equity Agreement, are clearly captured in your legal documentation is essential.
Where Do I Start?
A Sweat Equity Agreement can help relieve your startup’s cash flow pressures, but you must balance this benefit with your employer obligations. It’s wise to review your company’s structure and seek expert legal advice before proceeding further.
Consider utilising our Company Set-Up services as well as our Employment Contract solutions to ensure that your business is structured correctly to offer equity while remaining compliant with all 2025 regulations.
Remember, balancing financial constraints with legal compliance is key to sustainable growth. As more startups in 2025 explore innovative remuneration strategies, ensuring that your Sweat Equity Arrangement is sound and enforceable will protect your business’s future. For further insights, check out our range of legal guides on topics such as protecting your intellectual property and understanding terms of trade.
Sprintlaw has a team of experienced lawyers who can help you navigate these complexities during your business journey. Feel free to reach out to us at team@sprintlaw.com.au or call us on 1800 730 617 for an obligation-free chat.
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