Equity

What is equity?

Equity is a claim on what a company is worth. It is issued as shares, and the share count is tracked on a capitalization table that lists every holder: founders, employees with options, and investors. Your ownership is not the number of shares you hold, it is that number divided by all shares outstanding, so the denominator matters as much as the numerator.

Equity in a private startup is not money. It cannot be sold on an open market, it usually cannot be sold at all without company approval, and it is worth nothing until a sale, an IPO, or a secondary transaction turns it into cash. That is why founders talk about it as a promise: valuable if the company works, worthless if it does not.

How ownership and dilution are calculated

The formula is simple: ownership percentage = your shares / total shares outstanding (fully diluted). Fully diluted means counting issued shares plus the option pool and anything convertible into shares.

Say two founders split 8,000,000 shares evenly, so each holds 50 percent. They set aside a 1,000,000 share option pool for hires. Total is now 9,000,000, and each founder holds 8,000,000 / 2 = 4,000,000 shares of 9,000,000, or about 44.4 percent. An investor then buys 2,250,000 newly issued shares for 20 percent of the company. Total becomes 11,250,000, and each founder now holds 4,000,000 / 11,250,000, or about 35.6 percent.

Nobody took shares away. The pie got bigger and each existing slice became a smaller share of it. That is dilution, and it is the normal cost of raising money. The question is never "did I get diluted" but "did the cash I received buy more growth than the percentage cost me."

Types of equity you will encounter

Instrument	What it is	Usually held by
Common stock	Basic ownership, last in line if the company is sold	Founders, early employees
Preferred stock	Shares with extra rights, typically paid before common in a sale	Investors
Stock options	The right to buy shares later at a fixed strike price	Employees
Convertible instruments	Money now that becomes equity at a later round	Early investors

The preference stack matters more than most founders expect. If investors hold preferred shares with a liquidation preference, they get their money back before common holders see anything, which can mean a modest exit pays employees far less than a simple percentage calculation suggests.

Why equity matters for startups

For a small team, equity is the currency you have when cash is scarce. It buys senior hires you could not otherwise afford, and it aligns people who join early with the outcome years later. It is also the thing you can never take back cleanly, which is why the standard is four year vesting with a one year cliff: nobody keeps a full grant for three months of work.

Founders should apply vesting to themselves too. Cofounder splits are the most common cause of unfixable early damage, and vesting is what makes a cofounder departure survivable instead of fatal to the cap table.

Equity in practice

Imagine you and a cofounder split a company evenly and hire a first engineer with a 2 percent grant on standard four year vesting. Fourteen months in, your cofounder leaves. Because you both signed vesting schedules, they keep roughly a quarter of their stake and the rest returns to the company. Had you skipped vesting, they would walk away holding half the business while you build it alone, and every future investor would flag that dead equity as a reason not to fund you.

Common mistakes

• Splitting evenly without vesting. The split is less important than the schedule. Always vest, founders included.
• Handing out equity for favors. Advisors and early helpers should get small, vesting grants, not a percent for a few introductions.
• Chasing valuation over terms. A high number with aggressive preferences can pay you less than a lower valuation on clean terms.
• Ignoring the option pool. Pools created before a round dilute founders, not incoming investors. Know where the pool sits in the math.
• Treating paper value as wealth. Equity is illiquid until a real exit happens.

Related concepts

Equity is the thing you exchange in every financing, from angel investor checks and seed funding through later Series A, B, C rounds. Early money often arrives as convertible notes that turn into shares later, and the whole structure only becomes cash at a liquidity event.