I’m on a kick of watching business investment shows. The investors ask for certain percentages of the business, but what does that actually get them? What’s the difference between a 5% stake and a 25% stake? Do they take a profit share, do they also take on a percentage of the businesses debts? What is equity in layman’s terms?
It’s simply ownership of the business as others have explained.
The equity owners normally are not responsible for the debts of the company. The debt gets paid back before the equity, so equity holders may lose their investment, but normally they aren’t responsible for anything beyond that.
u/FreakyStyley23’s answer is correct, at least in theory. In practice, the number of shares determines two things (edit: for corporations):
1. If the company pays a dividend, and not all do, you get a share of that in direct proportion to the amount of equity (or shares) you have.
2. You get to vote on a few matters usually once a year, mostly on who the board of directors of the company are and if you approve of the auditing company. Sometimes there are a few other issues, such as an advisory vote on executive compensation. The number of shares you have determines the number of votes you get.
With point number 2, it is rare, although it does happen, that any of the board candidates lose a vote.
> do they also take on a percentage of the businesses debts
No. Corporations are legal entities that are distinct from their owners. The whole point of the corporate structure is that there is a liability shield between the business itself and the owners. Owners are not personally responsible for the liabilities of the business including debt.
>The investors ask for certain percentages of the business, but what does that actually get them?
It’s how much of the business they own. If the corporation has issued 100 shares and those 100 shares account for the totality of the ownership, buying a ‘25% stake’ would be buying 25 of the 100 outstanding shares. You now own 1/4 of the business.
It gets more complicated when you consider things like voting and non-voting shares, preferred shares, etc.
Think of a business like a pizza. A 5% stake is one slice of a pizza cut into 20 pieces. A 25% stake would be 5 out of 20 slices. Or 1/4 if cut into just 4 quarters.
The equity stake means the holder owns that amount of the business. That could mean a percentage of profits, but also the business itself might grow in value if it is successful. And a successful business might get acquired, might go public in an IPO and an equity stake would mean a payout or shares in the company.