Equity in business: A founder's perspective

Author:

The Carta Team

Read time:

16 minutes

Published date:

15 December 2025

Learn the fundamentals of company equity, including the different types you will issue and how to manage ownership as you build your business.

What is equity in business?

In the simplest terms, equity in business is ownership. In a private company, equity represents the total ownership divided among the people who have a stake in it, including founders, employees, and investors. This ownership gives them a claim on the company's future profits and assets, and it's important for all holders to understand the resulting taxes on equity, including capital gains.

You may see equity called “shareholders’ equity” (public companies) or “owners’ equity” (private companies). In each case the definition is the same: Equity is the portion of ownership shareholders have in a company.

You can think of business equity using a basic accounting formula: Assets - Liabilities = Equity. If a company were to sell all of its assets and pay off all of its debts, the value that remains is the equity. This is the core meaning of equity and represents the net worth of the business.

While a textbook definition of equity comes from the accounting formula of total assets minus total liabilities, this doesn't capture the full picture for a startup. The true value of a company’s equity isn't just what’s on the balance sheet today, but what the company could be worth in the future.

What are the types of equity?

The two main types of equity issued by private companies are shares of common stock and preferred stock. Both types offer different benefits to shareholders. In general, shares of common stock are issued to founders and employees, while shares of preferred stock are issued to investors.

Common shares

Common shares are generally issued to a company’s early founders and its employees. It represents a direct ownership stake and is granted with certain rights, such as voting rights, which allows holders to have a say in company decisions. This type of equity is the foundation of your company's ownership structure.

Preferred shares

Preferred shares are a type of equity issued primarily to investors when they invest in a company’s funding round. Preferred shares come with specific rights that common stock doesn't have, such as a liquidation preference.

Employee equity

Issuing equity to employees can create a possibility of profit if the company’s share price grows over time. Like all investments, however, gains are never guaranteed, and shares can become worthless if the company fails. The major types include:

Convertible instruments

Convertible instruments are tools used in early-stage fundraising. A SAFE is one of the most common convertible instruments founders use in their earliest funding rounds.

How does equity turn into cash?

For everyone involved—founders, employees, and investors—the equity they hold is just on paper until a specific event happens. The process of converting that paper ownership into actual cash happens during liquidity events.

Initial public offering (IPO)

An initial public offering (IPO) is when a private company offers its stock on the public market for the first time, allowing it to exchange shares for capital from the public and non-accredited investors.

How to calculate your equity’s value

Knowing how much shares are worth is essential to understanding the value of your equity. In the public markets, the share price of all companies listed on stock market exchanges is publicly available in real time. Private companies calculate share prices using a 409A valuation to establish the exercise price.

Frequently asked questions about equity

What does owning a percentage of equity in a company mean?

Owning a percentage of equity means you own that portion of the company's total value.

What is the difference between equity and stock?

Equity is the broad concept of ownership in a company, while stock is the specific security that represents a unit of that ownership.

What does dilution mean?

Dilution is the decrease in your ownership percentage when new shares are issued to investors or employees.