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Sweat Equity Agreement

Sweat Equity Agreement Template for United States

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Sweat Equity Agreement

"I need a Sweat Equity Agreement for a software developer who will work 20 hours per week in exchange for 2% equity in my AI startup, with a one-year cliff and four-year vesting period starting March 1, 2025."

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What is a Sweat Equity Agreement?

The Sweat Equity Agreement serves as a critical document for businesses, particularly startups, looking to compensate service providers with ownership stakes rather than cash. This arrangement, common in the United States, allows companies to preserve capital while attracting talented individuals who believe in the company's potential. The agreement typically details the scope of services, equity compensation structure, vesting terms, intellectual property rights, and compliance with relevant securities and tax regulations. It's essential for both parties to understand that this agreement is subject to U.S. federal and state securities laws, requiring careful consideration of regulatory requirements and potential tax implications.

What sections should be included in a Sweat Equity Agreement?

1. Parties: Identification of the company and service provider

2. Background: Context of the agreement and relationship between parties

3. Definitions: Key terms used throughout the agreement including relevant securities and tax terminology

4. Services: Description of work to be performed and service provider responsibilities

5. Equity Compensation: Details of equity grant, including amount, type, and compliance with securities laws

6. Vesting Schedule: Timeline and conditions for equity vesting, including any cliff periods and acceleration provisions

7. Intellectual Property Rights: Assignment of IP created during service period and work-for-hire provisions

8. Term and Termination: Duration of agreement and conditions for termination, including impact on unvested equity

What sections are optional to include in a Sweat Equity Agreement?

1. Non-Competition: Restrictions on competing activities during and after the service period

2. Confidentiality: Protection of sensitive information and trade secrets

3. Board Seat: Rights to board representation and associated terms

4. Tax Matters: Specific provisions relating to tax treatment and obligations

5. Dispute Resolution: Procedures for resolving disputes and choice of jurisdiction

What schedules should be included in a Sweat Equity Agreement?

1. Schedule A - Services Description: Detailed outline of services to be provided and performance expectations

2. Schedule B - Vesting Schedule: Detailed vesting terms, milestones, and acceleration triggers

3. Schedule C - Equity Details: Specific information about equity type, class, and associated rights

4. Appendix 1 - IP Assignment: Detailed intellectual property assignment provisions and procedures

5. Appendix 2 - Securities Law Disclosures: Required securities law disclosures and acknowledgments

Authors

Alex Denne

Head of Growth (Open Source Law) @ ¶¶Òõ¶ÌÊÓƵ | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

alex.den.21@genieai.co
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Industries

Securities Laws: Primary federal regulations including Securities Act of 1933, Securities Exchange Act of 1934, State 'Blue Sky' laws, and SEC Rule 701 governing equity compensation to employees and consultants

Employment Laws: Includes Fair Labor Standards Act (FLSA), state-specific labor laws regarding minimum wage, and regulations concerning worker classification (employee vs. independent contractor)

Tax Laws: Key sections of Internal Revenue Code including Section 83 (property transferred for services), Section 409A (deferred compensation), state tax regulations, and IRS guidelines on equity compensation

Corporate Laws: Includes Delaware General Corporation Law (if applicable), state-specific corporate laws, and compliance with company bylaws and articles of incorporation

Intellectual Property Laws: Encompasses copyright laws, patent laws, trade secret protections, and work-for-hire doctrine considerations for protecting company IP

Contract Laws: State-specific contract laws, Statute of Frauds, and common law principles governing contract formation and enforcement

Vesting Considerations: Includes Rule 144 compliance, restrictions on transfer of equity, and structuring of vesting schedules and acceleration provisions

Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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