Quick Summary
An equity stake represents ownership interest in a company, typically through shares of stock. It entitles the holder to a proportionate share of profits, voting rights, and proceeds in a sale.
An Equity Stake represents ownership in a company through shares or stock. It determines the holder's share of profits, voting power, and entitlement to proceeds if the company is sold or liquidated. Equity stakes are held by founders, investors, employees, and other shareholders.
Types of Equity Stakes
| Type | Characteristics | Typical Holders |
|---|---|---|
| Common Stock | Voting rights, last in liquidation | Founders, employees |
| Preferred Stock | Liquidation preference, may have limited/no voting | VC investors |
| Founders Equity | Common stock with vesting schedules | Company founders |
| ESOPs | Stock options for employees | Employees |
| Sweat Equity | Equity for non-cash contributions | Early employees, advisors |
Equity Stake Evolution Through Funding Rounds
| Stage | Founder Stake | Investor Stake | Option Pool |
|---|---|---|---|
| Founding | 100% | 0% | 0% |
| Seed | 70-80% | 10-20% | 10-15% |
| Series A | 50-60% | 20-30% | 10-15% |
| Series B | 40-50% | 30-45% | 10-15% |
| Series C+ | 20-40% | 45-70% | 5-15% |
| IPO | 10-25% | 60-80% | 5-10% |
Rights Associated with Equity Stake
- Economic Rights: Share in profits (dividends), proceeds from sale
- Voting Rights: Vote on major decisions (board, M&A, etc.)
- Information Rights: Access to financial statements and updates
- Preemptive Rights: Right to participate in future rounds
- Anti-Dilution Protection: Protection against down rounds
- Tag-Along Rights: Right to sell when others sell
Majority vs Minority Stakes
- Controlling Stake (>50%): Ability to control company decisions
- Blocking Stake: Enough to block special resolutions (varies by jurisdiction)
- Significant Minority (20-49%): Influence but not control
- Minority Stake (<20%): Limited influence, financial interest only
Calculating Equity Value
Value of Equity Stake =
Ownership Percentage × Company Valuation
Example: 10% stake in a company valued at ₹100 crore = ₹10 crore
Key Points
- Ownership percentage in a company
- Entitles holder to profits and sale proceeds
- Types: Common, Preferred, ESOPs
- Founders typically diluted to 10-25% by IPO
- Comes with voting and economic rights
- Can be controlling (>50%) or minority