What is equity

Definition

Equity has two meanings. In a startup, equity is the ownership stake: the shares a person holds, as a percentage of all the company's shares. What that stake is worth depends on the number of shares and the price per share in the last round, not on the balance sheet. In accounting, equity is book equity: the assets of the business minus its liabilities, the part that is left for the owners after every debt, as the IASB Conceptual Framework defines it. "Private equity" is a different phrase: funds that buy stakes in companies.

Why it matters

Cofounders, early employees and investors all take a stake instead of money, or on top of it, and each new holder shrinks everyone else's percentage. So the question is always what the new stake buys. A smaller slice of a company worth more can be worth more than a bigger slice of one that never grows: in the illustrative round below, Founder A's share falls from 60% to 42% while its paper value reaches ₪2,100,000. Equity for employees usually goes through an option pool and a vesting schedule rather than straight shares.

Directly related: Dilution, Cap table, Option pool.

Improvement tips

• Write down every equity promise from day one, to cofounders, employees and advisors, and record each allotment in the company's shareholder register.
• Before you give up equity, name what it buys: runway, a key hire, access to a market.
• Put founder and employee equity on a vesting schedule, so a stake follows the work.
• When someone says "equity", check which meaning they use: the ownership stake or the balance sheet figure.

Common mistakes

• Giving large stakes early to advisors or service providers who do not stay for the long run.
• Promising equity in an email or a conversation and never recording it, which surfaces as a dispute in the first funding round.
• Leaving founder shares without vesting, so a partner who leaves after a few months keeps a full stake.