So You Want to Talk About Equity
Need to fund your business but you don’t know how or why you need to give up equity to do so? We’re here to help! Equity can feel confusing because there are a lot of components to it. However, understanding equity and how it works will give you the business acumen to scale your business effectively. In this article, we will cover what equity is, how to calculate it, and why people gain equity.
What is equity?
Equity represents the percentage value that would be returned to a company’s shareholder if they are bought out or the company is acquired. When someone invests in a company, they receive an equity share. Shares are split between owners of the company and each person who owns a share is considered a shareholder.
How do I calculate equity?
- Add up all of the assets, which are investments that your business owns
- Add up your business’s total liabilities, which are its debts and financial obligations. This includes loans and mortgages.
- Next, subtract the total liabilities from the total assets
- The end result is how much equity is in the business
Why do people gain equity in a business?
Typically, investors will invest in a company if they see potential in its growth. They are only as successful as your business, so they want to see potential in the product and that the owner is willing to put in the work to support the company’s growth.
At first, it may seem as though giving up equity of your company equates to you losing your company. However, think of it this way: say you own a very small pie. The pie is 100% yours, but it is bite-sized and worth $1. If people want to invest in your pie, your percentage of ownership in the pie will decrease, but the value of the pie goes up, making your individual piece worth more. In other words, as the founder of your business, it is more valuable to own 20% of a $100 million dollar company than 100% of a $1,000 company. The more your business grows, the more valuable the equity you own becomes.
Throughout each phase of the Accelerator, raising money becomes important to support your business’ growth and allow you to make forward leaning decisions. Outlined below is the recommended amount of money we recommend raising by Phase:
Recommended Investment for Growth
Since the required investments are a lot for one person, bringing on shareholders in your business is a great way to raise funds and build your business to last!
In this knowledge article, we covered what equity is, how to calculate equity in your business, why equity exists, and how it is relevant to your Accelerator business. Equity represents a share that someone has in your company. Usually people who have equity in your company are investors, and they are confident that your business will grow. To find out how much equity someone owns in your company, subtract the total liabilities from the total assets. Throughout the Accelerator, you will likely bring on investors to help support your business, which is why you should know the ins and outs of equity.