What exactly is equity?

If you run a startup, you probably might have heard of equity, shares or stock. You probably might have signed an agreement with your co-founders or investors to give them a percentage of shares in your startup.

Equity a.k.a. shares or stock in American parlance is a term used to describe ownership of a company.

Having equity in a startup company means that you have a stake or an ownership interest in the startup. Under CAMA, once you have shares in a company, you become a member of that company and have certain rights; one of which is to receive dividends.

 

Who can own equity in a startup

As most startups are registered as a private limited liability company (LTD), they can’t offer equity to the general public so the following people can own equity in a startup:

  • Co-founder(s)

Upon registering your startup with the CAC, you will have registered your startup with a couple of people as initial members or co-founders of your startup. These people might be your ride or die or just people who have business acumen to run your startup with you. At the point of registering your startup, your co-founders can own a certain percentage of shares in the startup.

Not sure how to split equity with your co-founders, read this.

  • Employees

Apart from giving your employees money as their compensation for work done, you can give them equity in addition to their monthly salary or as the only compensation, if you’re still bootstrapping and can’t afford to pay salary.

This is now the norm with startups as a way to attract and retain employees and also get them to have a sense of belonging and loyalty to the startup.

  • Investors

As your startup grows, you will need funding from investors. These investors can be angel investors or venture capital firms who see potential in your startup. Most times these investors usually ask for equity in your startup in exchange for the money they invest in your startup.  In other words, you can say that they are acquiring or buying shares in your startup.

The topic of equity is inexhaustible however, it is important to note that depending on the type of equity given (ordinary shares or preference shares), this will, in turn, affect the rights and weight of decision making power wielded by each shareholder.

 

So as a startup owner, ensure that you give out the equity of your startup WISELY and with appropriate legal advice.