Sweat Equity & the Bee Sting

I staked out my spot in the shade at the skateboard park. Got out my book, biscuits and water bottle and prepared for a relaxing hour while the kids went completely berserk. It seemed like only 2 minutes later when all of a sudden there was that screaming that signifies pain, as compared to the scream where the sibling has done an injustice. Poor old Ben (7 yr old) had got stung by a bee.  And it didn’t muck about – he got his first ever bee sting right between the eyes.  All the adults winced – and he screamed like there was no tomorrow. Clearly he was in pain as he cried for 20 minutes solid. The problem was though that he didn’t get a swelling – not even that little white centre where the venom went in – which made it hard to appreciate his pain after his initial scream.

Which brings me, strangely,  to the topic of Sweat Equity.  Sweat Equity is real and painful and all consuming to the entrepreneur – but when an investor or new partner arrives there is little to see, little evidence to prove its real, and its in their interest to play down what may be there. So what to do?

Having bootstrapped 6 businesses in 23 years, I’ve found my involvement before profitability normally includes four things that actually matter (as compared to the venture idea), which make up my Sweat Equity:

1. Equipment – I’ve never started a business where I didn’t supply the initial furniture and IT, or loaned in the funds to buy it.
2. Office Infrastructure – The business own by myself and/or partners has normally started either inside my home or inside another venue I have rented for a different business, and normally using my telephone and internet.
3. Reduced or Missing Salary – I reckon that never in the history of commerce has anyone ever got paid what they believe they could earn elsewhere.
4. Favours and other intangibles – Almost every business I have started has cashed in favours I was owed or accessed my network for customers.

The problem with all of this though is that except in one occasion I have always had partners, either on day one or downstream that simply didn’t recognise that contribution.  I’ve had investors come in downstream who have said to me “sweat equity, your f*cking kidding me”.   Despite the fact that they were buying into a profitable business that was profitable because of what I’d previously forgone.

So after a number of years of alternatively ignoring the problem, or simply being frustrated and feeling like an idiot, I finally had the insight that solved my problem. You see when bootstrapping, I jumped in boots and all and didn’t think clearly about the roles I was playing. Not only was I the initial employee (or contractor) but I was also the initial investor – investing in kind.   This thinking was the key to the solution.

Now when I start something I new, I recognise that the business and its partners is separate from myself and my other interests.  My personal company invoices the new entity rental for:

• Any equipment that I loan in,
• Accommodation & infrastructure that I cover,
• Fees for any salary I forgo, and a
• Management fee to cover the rest.

And if the new venture can’t afford it, any assets I might need to buy are purchased my my personal company and rented in, rather than purchased by the new venture using funds I have loaned in.

The terms for this are normally interest free with extended repayment.  And although I’m still at risk if the venture fails  – I could still lose funds owed – I can at least recover the tangible assets which is a small mercy.

My sweat equity is now fairly recorded and gone from being an intangible to something that’s perfectly reasonable there is solid evidence for.   And the bonus is that this method allows me real insight into the profitability of the new venture, without being camouflaged by favours.

Since I have started accounting for my activities in this way (the last two ventures) I haven’t had a single potential investor question the value of my sweat equity.   Its now like a big throbbing bee sting there for the world to see, rather than just me crying about it.

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