Equity is mostly good, but not like Asset-level good, but good like the weather is nice and sunny and you’re going out for a jog and then the weather decides to start raining. Hard.
Equity is essentially money brought into the business by the business owners. So, if you, as an individual, own a business and you invest some of your personal money into the business – that money now sits in your business as an equity (which can then be used to purchase assets etc.). Equity represents the stake that you, as an individual hold in a business.
Examples of Equity can include:
- Any money brought into the business by the business owner, from their personal savings.
- Any physical asset (cars, furniture, machines, etc) that is brought in by the business owner into the business.
The most common way of raising equity is by selling shares in the business. When people buy a share in a business, they own a share (surprise, surprise!) in the business. So let’s say you own a cute little hotdog stand on the corner of Happy Park and business is good – so good that you think, hey, if I could raise more money, I could open up another stand on Joyful Park just down the road as well! So, you tell your friends and family that you are opening another stand and you are looking for investors! Since everyone and their grandma wants to be an “INVESTOR” these days, they agree to purchase shares in your business for $1,000 apiece and they become shareholders (or part-owners) of your business.
Good right? Yeah, like the calm before a storm kind of good. Without proper communication, many partnerships and shareholdings can devolve into ugly messes which makes everyone unhappy (except their lawyers). If you are not the sole owner of your business, you are still beholden to other shareholders in the business and you can’t run the business willy-nilly anyway you like. Also, your shares of the overall profits will get smaller the more shares you sell in the business. Basically, the more equity you raise for your business, the smaller your share of the pie will be. If you can grow the pie, then hooray! But if you can’t you may find yourself feeling more miserable with two hot dog stands than you were back when you only had one, especially if you are the only shareholder working their butt off in the business.
Before you leave, have you read about Assets and Liabilities?
If you think you know everything you need to know about Assets, Liabilities and Equity – its time to read about The Good, The Bad and The Ugly!