Start-up equity

What is equity in a start-up? Essentially, start-up equity describes ownership of a company, typically expressed as a percentage of shares of stock. On day one, founders own 100%. If you have more than one founder, you can choose how you want to share ownership: 50/50, 60/40, 40/40/20 ,etc. It will depend on how many founders you have and their contribution to the success of your company. However, to build your business, you will likely need to exchange equity for funding and to lure new employees. Early on, founders need to give up a significant percentage of equity to match the risk investors are taking by funding your startup. But as you grow and demonstrate greater success, your startup equity increases in value and investors are typically willing to pay more — or inversely accept less equity in exchange for their funding. When VCs invest capital in exchange for equity in your company, you are forming a business relationship. If your company turns a profit, investors make returns proportionate to the percentage of equity they have in your startup. On the other hand, if your startup fails, the investors lose their money. However, VCs are willing to take this risk because owning a percentage of a successful startup can be very profitable — and keeps the ecosystem moving when they use the proceeds to make investments in the next generation of startups.

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