Equity :

In the context of a business or corporation, equity represents ownership in the company. It can be in the form of common shares or preferred shares. Equity holders have a claim on the company's assets and earnings, and their ownership can be divided into a variety of classes and types.

Shares and Equity :

Yes, shares in a company are often referred to as equity. When someone owns shares in a company, they own a portion of that company's equity.

Total Equity :

Total equity is the sum of all the equity capital invested in the company. This includes the initial investment from founders and early investors, as well as any additional equity raised through subsequent funding rounds. Total equity is a key component of a company's balance sheet.

Why Equity is Preferred :

Equity can be advantageous because:

1. Long-term financing

Equity financing doesn't have to be repaid immediately and can be a more sustainable way to fund a company's growth compared to debt financing.

2. No obligation to repay

Unlike debt financing, equity financing does not require the company to make regular interest payments or repay the principal amount.

3. Shared risk and reward

Equity investors share in the company's success and growth, but they also share in the risk if the company does not perform well.

4. Alignment of interests

Equity investors have a vested interest in the company's long-term success, which can help align their interests with those of the company's founders and management team.

Lets Understand with an example :

Harsh is an entrepreneur who has just founded a tech startup. To get his business off the ground, he needs funding. He decides to raise equity financing by selling shares of his company to investors.

Initial Equity Financing

He starts by selling 30% of his company to an angel investor for $300,000. This means that the angel investor has acquired a 30% ownership stake in the company, and Harsh still owns 70%. The angel investor believes in his vision and decides to invest an additional $200,000 to help the company grow. In exchange, Harsh agrees to sell an additional 20% of his company, bringing the investor's total ownership stake to 50%.

Hope this was helpful! There's more to explore! Learn about Exit-Strategy here.