What is Equity in Startups?
Suppose 2 people started a company, initially they would need to create some number of shares for the company. for example, they choose to create 1000 shares for their company.
Now after some discussion, they agreed to have 500–500 shares each. that means they both will own 50% of the company. Equity represents how much stake does own by an individual in the company.
And based on some calculations it was finalized that the company valuation (worth) is 1000$, which means each share is worth 1$.
Let’s say they got an investor to invest 100$ in their company, which means the investor will get 100 shares of the company. Now, none of the founders will reduce their share count but instead, the company will issue 100 new shares (Share ownership rarely changes, when there is a need to have a new partnership, the company always issues new shares).
Initially, we had 1000 shares with a valuation of 1000$. After the investment, the company created 100 new shares. Now if we do the math, there are now 1100 shares for the company. and the valuation of the company now became 1100$.
Let’s see how much equity each of them has in the company. Founder 1 & 2 will have 500 shares each which now represents around 45.45% of the company and investor has around 9.09% of the company.
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