What are sweat equity shares? What is sweat equity valuation?
Sweat equity shares are defined under Section 2(88) of the Companies Act, 2013, and are regulated by Rule 8 of Companies (Share Capital and Debentures) Rules, 2014. They are issued to employees and other stakeholders for their contributions to the business. They can be issued for the completion of a task or towards gaining intellectual property rights.
Sweat equity valuation is the process through which a registered valuer will determine the value of equity shares issued to an employee or director. The value of equity shares will be determined in consideration of the value of intellectual property rights, expertise or, value addition.
Benefits of issuing sweat equity shares
The benefits of issuing sweat equity shares to employees/directors are-
- For a new business or start-up, issuing equity shares to their employees for their contributions can be beneficial because many new businesses are strapped for cash. Therefore, incentivizing good work with shares helps morale.
- Not only are issuing sweat equity shares to employees a good way of incentivizing their hard work and contributions, but it also gives them a feeling of belongingness, and they'll be more willing to stay loyal to one organization.
- Issuing sweat equity shares is also a great way for an up-and-coming business to attract talented and skilled individuals.
Parameters of Sweat Equity valuation
Sweat equity shares are issued to employees/directors for their contributions to the business. One way or another, these contributions, be they their expertise or intellectual properties, are hard to quantify in numerical values. Therefore, when sweat equity valuation takes place, sweat equity valuation consultants will try to determine the value of the shares after studying the following parameters-
- Sweat equity valuation consultants will study the performance of the business and the historical financial performance.
- Consultants working for sweat equity valuation firms will study the quality of clients and the management of the company.
- Sweat equity valuation India firms will determine the value of the equity shares based on prevailing industrial norms.
- Firms that deal in sweat equity valuation will study the company’s competitive advantage over competitors.
- The merchant bankers or chartered accountants will study the current business environment and economic conditions during the sweat equity valuation process.
Methodology and approaches to sweat equity valuation
The approaches and methods used to determine the value of sweat equity shares are-
- Cost approach
- Market approach
- Income approach or Discount cash flow method
The discount cash flow method is the most commonly utilized approach for sweat equity valuation. To arrive at the value of equity shares, DCF is used to calculate the value of the company as it is, and the other calculates the value of the company without that person.
Who can conduct a sweat equity valuation?
The sweat equity valuation of intellectual property rights and expertise is conducted-
- For listed companies, sweat equity valuation is conducted by a merchant banker or chartered accountant. The merchant banker must get their report certified to prove that it was completed as per accounting standards.
- Sweat equity valuation is conducted by a SEBI registered merchant banker or chartered accountant with adequate experience for unlisted companies.
Our Sweat Equity Valuation Services
We offer our clients sweat equity valuation services like no other sweat equity valuation company in the business. Our team of experienced financial experts helps you determine the value of IPR/expertise and the value of your shareholders. Our team of experienced corporate professionals provides our clients with well-researched reports and proper valuation certification.