Equity
Description
Equity is one of the two main types of capital that a company can use to fund its operations, the other being debt. Equity represents the ownership interest that shareholders have in a company, and is typically represented by their shares of stock. Shareholders who own equity in a company have the right to vote on important business decisions, such as the election of board members and major corporate initiatives.
Equity is an important concept for startups because it is often used as a form of compensation for employees, as well as a way to raise capital. Many startups offer equity to employees in lieu of higher salaries, as a way to incentivize them to work hard and help the company grow. Startups can also raise capital by selling equity to investors, such as angel investors and venture capitalists.
Equity can be calculated using a number of different methods, including the discounted cash flow method and the dividend discount model. The value of a company's equity can be affected by a number of factors, including its revenue, expenses, and growth potential.
Frequently Asked Questions
Equity represents ownership in a company, while debt represents a liability that the company owes to its creditors. Equity does not have to be repaid, while debt typically does.
Dilution refers to the reduction in the ownership percentage of existing shareholders when new shares are issued. This can occur when a company raises new capital by selling shares of stock to investors.
Equity compensation is typically structured as stock options or restricted stock units (RSUs). Stock options give employees the right to buy shares of stock at a certain price in the future, while RSUs represent actual shares of stock that are granted to the employee.
When Airbnb went public in December 2020, the company's shares were priced at $68 each, giving the company a market capitalization of more than $100 billion.
Tesla has become one of the most valuable car companies in the world, in part due to its successful use of equity to raise capital and compensate employees.
Further Reading Materials
"The Intelligent Investor" by Benjamin Graham
"The Lean Startup" by Eric Ries
"Venture Deals" by Brad Feld and Jason Mendelson.
