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In simple words, equity means ownership in a business. It shows how much of a company someone owns, either through shares or investment. Whether you’re an entrepreneur building a startup or an investor putting money into a company, equity is a key financial metric that decides your value and control in that business.
What is Equity in Business?
Equity in business refers to the value of an owner’s share in the company after subtracting liabilities from assets.
📌 Formula:
Equity = Assets – Liabilities
Example:
If a company owns ₹10,00,000 worth of assets and owes ₹4,00,000 in liabilities:
Equity = ₹10,00,000 – ₹4,00,000 = ₹6,00,000
This ₹6,00,000 is the total equity of the business.
Why is Equity Important?
- Ownership Control: Determines decision-making power.
- Valuation Tool: Helps investors understand a company’s worth.
- Funding Opportunities: Attracts investors who get equity in return.
- Financial Health Indicator: Higher equity shows a strong business.
Types of Equity in Business
| Type | Description | Example |
|---|---|---|
| Owner’s Equity | Equity owned by the sole proprietor/partner. | A shop owner has ₹5 lakh equity. |
| Shareholder’s Equity | Equity held by company shareholders. | 1000 shares owned in a company. |
| Private Equity | Investment by private investors/firms. | Angel investor funds a startup. |
| Public Equity | Equity available on the stock market. | Buying shares of listed companies. |
| Retained Earnings | Profit reinvested in the business. | Equity is available on the stock market. |
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How is Equity Calculated?
Here’s a breakdown of how equity is shown in a business balance sheet:
| Particulars | Amount (₹) |
|---|---|
| Total Assets | 12,00,000 |
| Total Liabilities | 5,00,000 |
| Equity (Assets – Liabilities) | 7,00,000 |
Tools for Calculation:
- Balance Sheet
- Accounting Software (Tally, Zoho Books, QuickBooks)
Equity vs. Ownership
| Basis | Equity | Ownership |
|---|---|---|
| Meaning | Value of shareholding | Legal control or right |
| Shown In | Financial Statements | Shareholder documents |
| Transferable | Yes | Yes, with conditions |
| Measured In | ₹ value or percentage | Percentage/stake |
💡 Note: All owners have equity, but not all equity holders may have full ownership rights.
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Equity in Startups
In startups, equity is often given in exchange for:
- Funding (e.g., seed, Series A)
- Services (e.g., technical co-founders, advisors)
- Employee Stock Options (ESOPs)
Startup Equity Distribution Example:
| Stakeholder | Equity % |
|---|---|
| Founders | 60% |
| Investors | 25% |
| Employees (ESOP) | 10% |
| Advisors | 5% |
ALSO READ | What is Turnover in Business? An Essential Guide to Key Financial Metrics
Equity for Investors
Investors use equity to:
- Assess ROI (Return on Investment)
- Gain profits via dividends or resale
- Gain control through board positions
Equity ROI Example:
If an investor buys equity worth ₹2 lakh and the company’s value grows 5x,
Their investment value becomes ₹10 lakh.
How Equity Affects Business Decisions
- Dilution Risk: Raising funds may reduce founders’ equity.
- Voting Rights: Major equity holders get more say in company matters.
- Exit Strategy: Equity decides payout during IPO or acquisition.
Common Terms Related to Equity
| Term | Meaning |
|---|---|
| Equity Financing | Raising money by offering shares. |
| Dilution | Reduction in ownership % after new shares are issued. |
| Cap Table | Chart showing ownership distribution. |
| Book Value | Equity is based on the current market price. |
| Market Value | Equity is based on the current market price. |
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Conclusion
Equity in business isn’t just a financial term — it’s the backbone of ownership, investment, and valuation. Whether you are a new entrepreneur looking for investors or a seasoned businessperson planning expansion, understanding “what is equity in business” can make or break your financial future. Knowing how equity works helps you attract the right partners, make smarter decisions, and build long-term success.
Frequently Asked Questions (FAQs)
Equity means the ownership value you have in a business after subtracting its debts.
Owner’s Equity, Shareholder’s Equity, and Retained Earnings are the most common types.
Profit is the income earned during a period, while equity is the total value of ownership in the business.
Equity represents ownership and determines how much profit and decision-making power an investor has
Yes, if a company’s liabilities are greater than its assets, the equity becomes negative, which is a financial warning sign.
Issuing more equity can dilute the ownership percentage of existing shareholders
Startups use equity to raise funding, reward employees, and attract co-founders or advisors.
ESOP stands for Employee Stock Ownership Plan — a program that gives employees ownership shares in the company.
Equity reflects the net worth of a company and is a key factor in business valuation for investments or acquisitions.
You can increase equity by reinvesting profits, contributing more capital, or acquiring additional shares.
