Equity

Equity in a company or asset can be calculated by subtracting liabilities from the overall value. It is also referred to as net worth or book value, and is divided into shares of stock. An individual’s equity percentage in a business reflects what ownership stake they have.

A Scenario : Understanding Equity

John, the owner of a small retail store that specializes in handmade crafts, is looking to open a second location but doesn’t have sufficient funds. Although he has been running his business for five years now, the lack of capital has hindered his expansion plans.

John wants to fund the expansion of his business and opts for equity financing. To secure this, he meets with many investors and showcases his well-crafted business plan which illustrates the projected growth and potential rewards of opening the new location.

Sarah, the investor, is highly impressed with John’s plan and makes a generous investment of $100,000 in exchange for 25% equity stake in the business.

Due to the additional funds, John was able to secure a new location and hire extra employees. The venture proved fruitful as the company started to witness tremendous growth.

As an investor in the company, Sarah gets to reap the rewards of a successful business; dividends and potentially an increase in her equity stake. This is her return on her initial investment.

In this scenario, John was able to secure equity financing to expand his business, and the investor, Sarah, was able to invest in a promising business and see a return on her investment. Equity financing can be a great way for businesses to grow and expand, however it does come with the cost of relinquishing some ownership in the company.