Equity Stake

What is an Equity Stake?

An equity stake is the amount of ownership that someone has in a company. This stake is usually expressed as a percentage. Having an equity stake in a business normally means they have a degree of control over its direction. The amount of influence will depend on the stake.

Techopedia Explains the Equity Stake Meaning

The equity stake meaning is best described as the percentage of ownership in a company by a person, group, or organization. Owning an equity stake in a business usually means the holder can exert a degree of influence over how it’s managed and operated.

For example, if someone owns more than 50% of the stock, they will typically be in control. If they have less, then they may choose to ‘join forces’ with another shareholder instead.

How Equity Stakes Work

Equity stakes can work in different ways. For example, investors take an equity stake when they buy shares in a company that’s trading on one of the stock markets. The value of this stake will depend on how many shares an individual has purchased and what percentage this is of the entire issued capital available.

However, there are other types of equity stakes. For example, they can occur in startup businesses that aren’t yet publicly traded. Holders are often founding investors or employees who agree to join the business in exchange for a stake in the company.

This can be a wise move as if it proves to be an overwhelming success, the value of this stake could end up rising substantially.

Equity Stakes vs. Other Forms of Investment

Startups may consider other forms of financing instead of equity stakes.

For example, the founder may decide to be the sole investor in their business and fund it through personal savings, loans from family members, and credit card debt. The risk, in this case, is totally on this individual. If the business doesn’t take off they could be left with hefty debts. However, if it’s a success then they’ll enjoy all the profit!

Another option is finding grants. Depending on the sector, a company may qualify for funding from organizations and even charities. This will help you avoid handing over an equity stake.

Then there is debt financing. This basically involves taking out loans from banks. While the benefit is that you keep all your equity, the downside is you’ll need to repay the loan, with interest.

How to Calculate Equity Stake

There is a simple calculation that will give you the equity stake. You divide the number of shares owned by the total number outstanding and then multiply by 100.

This will give you the percentage ownership.

How to Calculate Equity Stake — Source: UniversalCPAreview

Types of Equity Stakes

When someone asks what the equity stake definition is, the answer is that it’s a part of ownership in an organization. However, there are many different types of equity stakes. Here are some that you may encounter within a company.

Ordinary Shares

These are the most common. You are likely to be buying these when you invest in publicly traded companies.

Preference Shares

These enable the holder to benefit from some preferential rights, such as the right to fixed dividends.

Non-Voting Shares

Unlike ordinary shares, these don’t come with a right to vote or attend annual meetings. They’re often given to employees as part of their remuneration package.

Redeemable Shares

These are usually issued with the understanding that the company may buy them back at a later date.

Equity Stakes Examples

Startup InvestmentStock MarketVenture Capital StakesMiscellaneous

This is when an individual is given a stake in the early stages of a business, often in exchange for an investment.

Buying shares of publicly traded companies through a broker. This will give you an equity stake in the company.

This is when a venture capitalist firm provides funding to an organization in return for an agreed equity stake in the business.

You can also have stakes for joint ventures. This may be when two companies join forces to start a new organization. Each will have an equity stake.

Equity Stake Pros and Cons

One of the positive aspects of an equity stake is that you will get to share in the financial success of a business and see the value of your holding grow.

Just think about the possibility of putting your money into an unknown business and watching it transform itself into the next Microsoft or Apple.

Pros

An ownership stake and influence in the business
Potential to enjoy returns – and maybe even dividends
Being part of an exciting growth journey

Cons

Losing your money if the business fails
Dilution of your stake if more shares are issued.
Experiencing volatility if the stock market traded

The Bottom Line

An equity stake can be a lucrative investment. It represents the ownership of a stake in a business that could deliver returns over time. However, there are no guarantees. The value of this stake will depend on the company’s success or otherwise.

If it fails to generate a profit and becomes swamped by debt, then the stock price (if it’s quoted) is likely to sink without trace, taking the value of your holding with it.

There’s a similar risk when you take an equity stake in a startup that’s not publicly traded, as there’s no guarantee the idea will take off. In this case, you could lose all the money invested.