What Does Equity Mean? How Does It Work?

Equity represents the financial health of your company and its ownership. It represents the amount of money that should be returned to the Company’s shareholders. It also presents the value of a company minus any liabilities owned by any business and not transferred with the sales.

Click on the links in the table of contents below to navigate directly to any section.

• Business Equity: What Does it Mean?
• Understanding the Equities?
• Use of Equity In a Company
• Providing Shares to the Employees
• Raise Funds Through Selling Equity
• Is It Good to sell or give my equity to the company?

Business Equity: What Does it Mean?

If we discuss equity in financial terms, it is a business’s value once all the liabilities are deducted from assets. So, the more equity a company has, the more valuable it becomes.

A business owns valuable assets to the Company, such as property, cash, equipment, copyright, or customer money.
You need to pay liabilities in the future, such as tax loans, repayments, or suppliers.

Knowing that businesses have much more worth on the balance sheet is essential. This means there will be much more value in the company’s potential growth, market opportunities, or brand loyalty.

Understanding the Equities?

Equity means a business’s value, which is split up among different shareholders who have company shares. Equity indeed shows the value of a business, but this word mainly refers to the shares. So, if you own equities in a company, you will be part of the equity business.

Use of Equity In a Company

Equity in a company means you own part of it as a shareholder, which can be used to find investments or reward and motivate employees.

As a shareholder, you are usually entitled to receive dividend payments from the company’s profit according to the number and type of shares you own. The more profit a company makes, the more funds are available for dividend payments.

Also, the more equity you own in the business, the more funds will be available. Shareholders can also sell their shares for profit at a later date, although some companies use a special shareholder agreement that restricts them to whom they can sell their shares.

Providing Shares to the Employees

Some companies reward the share to employees due to good performance or offer them a special buying price. This is very attractive because it enables employees to share the profit that they work for.

If the company is relatively new or has the potential to grow, you can use it as an incentive to hire talented people. These are called Employment-Related Schemes.

Raise Funds Through Selling Equity

When you own shares in any business, you own equity and can share the profits. If the business grows, the profit and equity value also increase. A limited company that needs to raise money to finance further growth can consider selling its equities. Also, it is a common practice to sell shares to anyone, although you need to be careful about how you describe them.

You can sell shares to anyone, but you must be careful when raising funds for the business. There are also strict rules for promoting investments in your industry.

Is It Good to sell or give my equity to the company?

Every business is different, and the company’s growth depends on you and your company. Some companies create various kinds of shares called share classes or alphabetic shares (which refer to how they are recorded).

This enables the company to issue or create shares while controlling what the shareholder is entitled to.

Example

Giving shareholders a minor cut of the company’s profit or removing their authority to vote on company decisions.

Share structure can be complex, so seek advice if you need clarification on the whole process.