Glossary/Equity
Valuation & Equity

Equity

Ownership interest in a company, represented by shares of stock.

Full Definition

Equity represents ownership in a company, typically in the form of shares of stock. Equity holders are entitled to a proportional share of the company's value and, depending on the type of equity, may have voting rights and dividend entitlements.

Types of Startup Equity

  • Common Stock: Typically held by founders and employees; has voting rights but lower priority in liquidation
  • Preferred Stock: Held by investors; includes special rights like liquidation preferences and anti-dilution protection
  • Stock Options: The right to purchase shares at a predetermined price (strike price)
  • Restricted Stock Units (RSUs): Shares granted subject to vesting conditions

Equity Distribution

In a typical startup, equity is distributed among founders (50-70% initially), investors (20-40% over multiple rounds), and employees via an option pool (10-20%).

Typical Startup Equity Distribution

Founders60%
Investors25%
Employee Pool12%
Advisors3%

Real-World Example

A co-founder receives 30% equity in the company, represented by 3 million shares of common stock.

Frequently Asked Questions

What is equity in a startup?
Equity is ownership in the company, represented by shares of stock. Founders, investors, and employees each hold equity. It entitles holders to a proportional share of the company's value upon an exit (sale or IPO).
What is the difference between common stock and preferred stock?
Common stock is held by founders and employees — it has voting rights but is last in line during liquidation. Preferred stock is held by investors — it comes with special rights like liquidation preferences, anti-dilution protection, and sometimes guaranteed dividends.
How much equity should I give employees?
Early employees (first 10) typically receive 0.5-2% equity each. The total employee option pool is usually 10-20% of the company. Exact amounts depend on role, seniority, stage of the company, and cash compensation trade-offs.
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Equity: Definition & Examples | Datapile