Equity represents an ownership interest in a business, typically expressed as shares or a percentage of ownership, which entitles the holder to a portion of the company’s profits and, in some cases, voting rights.
What is Equity?
In business, equity represents the value of an owner’s stake in a company after all debts and liabilities are subtracted from its total assets. It reflects both financial ownership and, often, decision-making rights—such as voting on key matters, receiving profit distributions, or claiming a share of proceeds if the business is sold.
The form equity takes depends on the business structure. In corporations, equity is typically represented by shares of stock, which can be issued in different classes (e.g., common or preferred) with varying rights such as voting power, dividend priority, or liquidation preference. In an LLC, equity is expressed as a percentage of membership interest, and in partnerships, it’s held as a partnership interest. While stock is one way to represent equity, it is unique to corporations; equity in non-corporate entities is recorded differently and may not be tradable in the same way as stock.
Equity is central to financing strategies, particularly for startups and high-growth companies. Instead of borrowing funds, businesses may issue equity to investors in exchange for capital. This can dilute existing ownership as more shares or interests are issued, making it essential to track ownership changes with a capitalization table (cap table). For non-U.S. founders with U.S. companies, understanding equity is especially important, as U.S. investors often expect standardized corporate equity structures—typically in the form of Delaware C-Corp stock.
Beyond fundraising, equity is a powerful tool for attracting and retaining talent through stock options or equity grants. These incentives give employees the opportunity to benefit financially if the company’s value increases. However, equity also carries risk: in a liquidation, equity holders are paid last—after all debts and other obligations—meaning returns depend entirely on the company’s financial success.
From a business perspective, equity is the overall measure of ownership value, while stock is a formal, tradable representation of that equity in corporations. Understanding this distinction is crucial when structuring a business, negotiating investment deals, or planning for growth and exit strategies.
