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Equity

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In finance and accounting, ownership equity, commonly known simply as equity is the difference in value between the assets and the claims on them (liabilities), which accrues to the owner(s). In case the owners are shareholders it is usually called shareholders' equity.

In financing a small business, the term equity typically refers to the percentage and type of ownership an individual (or entity) holds in the venture.

Typically, in a bankruptcy court, creditors have the first claim on assets and ownership equity is the last claim against assets, paid only after all other creditors are paid.

Equity & financing a small business

Equity and "cash" are not the same thing. For example, one does not exchange a percentage of ownership in a company for a loan. The business can secure the loan, but ownership is not exchanged. However, investors (be they Venture capitalists, angel investors or friends and family) typically provide capital (cash) in exchange for a percentage of ownership.

The percentage of equity exchanged for capital depends on a wide array of factors. For example, as a small business evolves from an "idea" to a profitable enterprise, its value increases, and therefore, the percentage of ownership (equity) necessary to be exchanged for capital will decrease.

See Also

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