Equity
Equity refers to ownership or a share of something valuable, most commonly used in the context of business, finance, and real estate. It represents the value of an ownership interest in a company or property, often expressed as a percentage or in monetary terms. Equity is a fundamental concept for startup founders, investors, and everyday individuals, as it relates to wealth creation, financial fairness, and economic participation.[1]
Overview
In its simplest form, equity is the value of an asset after subtracting any debts or liabilities associated with it. For example, if a person owns a house worth £200,000 and owes £50,000 on a mortgage, their equity in the house is £150,000. In business, equity represents the ownership stake held by shareholders in a company, calculated as the company's total assets minus its total liabilities.[2]
Equity is often associated with fairness, as it implies a proportional share of ownership or benefits. It is a key concept in economics, accounting, and social justice, with different meanings depending on the context.
Equity in Business
In a business or startup, equity refers to the ownership interest held by individuals or entities, such as founders, employees, or investors. It is typically represented by shares or stock in a company. For example, if a startup has 100 shares and a founder owns 60, they have 60% equity in the company.[3]
How Equity Works in Startups
For startup founders, equity is often their primary asset, representing their ownership in the company they created. Founders may give up equity to raise capital from investors, such as venture capitalists or angel investors, in exchange for funding. For instance, if a startup raises £1 million by selling 20% of its equity, the company is valued at £5 million.[4]
Employees may also receive equity as part of their compensation, often in the form of stock options or restricted stock units. This aligns their interests with the company’s success, as their shares increase in value if the company grows.[5]
Why Equity Matters
Equity is critical for startups because it:
- Attracts investment to fund growth.
- Motivates employees by giving them a stake in the company’s future.
- Determines control, as those with more equity often have more decision-making power.[6]
For investors, equity represents potential profit. If a company grows or is sold, their shares may increase in value. However, equity investments carry risks, as the value can decrease if the company underperforms.
Equity in Real Estate
In real estate, equity is the portion of a property’s value that the owner truly “owns” after accounting for any outstanding mortgage or loans. For example, if a property is worth £300,000 and the owner has paid off £100,000 of the mortgage, their equity is £100,000. Homeowners can build equity over time by paying down their mortgage or through property value appreciation.[7]
Home equity can be accessed through loans or lines of credit, allowing owners to borrow against their property’s value for purposes like home improvements or debt consolidation.
Equity in Social and Economic Contexts
Beyond finance, equity is often used to describe fairness and justice in distributing resources or opportunities. In social justice, equity means ensuring that individuals or groups have access to what they need to succeed, accounting for systemic inequalities.[8] For example, providing extra educational support to disadvantaged students aims to create equity in outcomes.
In economics, equity is linked to wealth distribution and economic fairness. Policies like progressive taxation aim to promote equity by reducing income disparities.[9]
Equity vs. Equality
Equity is often confused with equality. While equality means treating everyone the same, equity focuses on fairness by addressing individual needs or circumstances. For example, giving every student the same textbook assumes equality, but providing additional tutoring to struggling students promotes equity.[10]
Key Takeaways
- Equity represents ownership or a stake in an asset, like a company or property.
- In startups, it’s used to attract investors and reward employees.
- In real estate, it’s the value of a property minus debts.
- In social contexts, equity means fairness in opportunities and resources.
- Understanding equity helps startup founders, investors, and everyday people make informed financial and social decisions.
See Also
References
- ↑ Brigham, Eugene F. (2019). Fundamentals of Financial Management. Cengage Learning. pp. 45–47. ISBN 978-1337395250.
- ↑ "Equity Definition". Investopedia. Retrieved 1 June 2025.
- ↑ Damodaran, Aswath (2014). Applied Corporate Finance. Wiley. pp. 102–105. ISBN 978-1118808931.
- ↑ "How Startup Equity Works". Y Combinator. Retrieved 1 June 2025.
- ↑ Blasi, Joseph R. (2013). "Employee Ownership and Equity Compensation". Journal of Employee Ownership Law and Finance. 25 (2): 15–30.
- ↑ Gitman, Lawrence J. (2017). Principles of Managerial Finance. Pearson. pp. 89–92. ISBN 978-0134476315.
- ↑ "Home Equity Basics". Consumer Financial Protection Bureau. Retrieved 1 June 2025.
- ↑ Rawls, John (1971). A Theory of Justice. Harvard University Press. pp. 54–60. ISBN 978-0674000780.
- ↑ Piketty, Thomas (2014). "Capital in the Twenty-First Century". American Economic Review. 104 (5): 48–53. doi:10.1257/aer.104.5.48.
- ↑ "Equity vs. Equality: What's the Difference?". Ford Foundation. Retrieved 1 June 2025.