What Is Equity?
Equity is ownership in a company, usually held as shares of stock, and it entitles the holder to a portion of the company's value.
How it works
When you own equity, you own a piece of the business. In a corporation, equity is divided into shares. Founders, investors and sometimes employees hold shares or the right to buy them later through stock options. Equity can be common stock, usually held by founders and employees, or preferred stock, usually issued to investors with extra rights.
Equity is not cash. It only turns into money if the company is sold, goes public, or the holder is allowed to sell shares to someone else. Many startup shares pay nothing, ever.
Example
For example, a company has 10,000,000 shares. An employee is granted options on 100,000 shares, which is 1 percent of the shares today. If the company is later sold for $20,000,000 and nothing has diluted that stake, 1 percent would be about $200,000 before the exercise cost and taxes. In practice, later rounds usually dilute it.
Why founders care
Equity is how startups pay people when cash is short, and how founders share risk and reward. Handing out equity changes who controls decisions and who shares in a sale, so it deserves careful thought and written agreements. Equity also has tax consequences, so confirm details with an accountant.
Common mistakes
- Promising equity informally without paperwork or vesting.
- Giving away too much early, leaving little room for investors and hires.
- Assuming equity is worth a specific dollar amount today.
Frequently asked questions
What does equity mean in a startup?
It means a share of ownership in the company. For employees it often comes as options that vest over time. For founders it is usually shares issued at formation. Its value depends on the company's outcome.
Equity vs salary: what is the difference?
Salary is guaranteed cash for work. Equity is a stake that may be worth a lot, a little or nothing, and typically pays off only at a sale or public offering. Many people weigh both.
Related terms
Go deeper
- How to Split Equity Between Co-Founders (and Vesting) GuideHow to split equity between co-founders: factors to weigh, equal vs unequal splits, 4-year vesting with a 1-year cliff, and a worked example with round numbers.
- How to Find a Co-Founder and Know If They Fit GuideHow to find a co-founder: do you need one, where to look, how to test the fit, solo founder vs co-founder, and the red flags that should make you walk away.
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General information, not legal, tax or financial advice. Reviewed 11 November 2026.