What is Equity?
Nexa Consultancy | Startup & Finance Glossary
Equity represents the ownership interest in a company. For a startup, it is the most valuable currency. Founders hold equity, and they sell a portion of it to investors in exchange for capital. They also grant equity (in the form of stock options) to employees to attract and retain talent.
Why it Matters for Startups:
Understanding and managing your equity is paramount. Every time you issue new shares for funding or ESOPs, you are diluting the ownership stake of all existing shareholders. This dilution must be managed carefully to ensure founders and key employees remain motivated throughout the company's long journey.
Example:
Two founders start a company, each owning 50% of the equity. They raise a seed round and sell 20% of their company to an investor. They are now diluted, and each founder owns 40% of the company, with the investor owning 20%.