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?
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Equity is ownership of the business. Not all equity is the same, and the exact terms depends on the deal being made.
Equity essentially always involves some claim on the profits generated by the business. If the business makes $1 million in profits, someone with 25% equity is entitled to $250,000. It also typically involves a claim on the assets of the company. If for some reason it was sold or shut down (outside of bankruptcy), they would get a portion of whatever it sold for, either as a whole company or as leftover pieces. Note that buying a certain amount of equity often depends on the company’s valuation. The more a company is “worth,” the more expensive any piece of equity. This is why the investors on Shark Tank will often comment that a pitch is claiming a valuation that is too high. The lower the valuation, the more equity they can buy for the same amount of money.
Equity also implicitly involves the right to *control* the business, though how exactly depends on the corporate governance. In principle, if you sell 1 person a 51% share (2 people a 26% share, etc.) in your company, they can outvote you when it comes to questions of how the company should actually be run. You would maintain your equity (and hence your right to profits and assets), but may get no say in how the business runs.
The people appearing as “sharks” on a show like Shark Tank are unlikely to become personally involved in the governance of the companies they invest in, but they may have employees who *will* wield that ownership share to change how the business is run. However in some sense, this is the point. The people who appear on Shark Tank are looking less for investment dollars and more for the boost in notoriety and distribution that comes from partnering with a “celebrity investor.” This is why they’re usually pitching apps and home gadgets and not, like, manufacturing car parts or managing real estate.
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