Equity is, at its simplest level, ownership. It represents the value of the shares issued by a company. When you start a business, you typically own 100 percent of the equity. It is the entirety of the pie.
However, in the context of a high-growth startup, equity transforms from a simple measure of ownership into a complex currency. It becomes the primary tool a founder uses to build something larger than themselves. Since most startups are cash poor in the early days, equity is used to purchase things that the bank account cannot afford.
You trade equity for capital from investors. You trade equity for talent from early employees. You trade equity for advice from mentors. It is the fuel that powers the engine before revenue kicks in.
The Currency of Risk
#Equity is fundamentally a measure of risk and reward. It is a long-term bet.
When an employee accepts equity as part of their compensation, they are agreeing to take a lower cash salary today in exchange for a lottery ticket that might pay out in five to ten years. If the company fails, that equity is worth zero. If the company succeeds, that equity could be worth millions.
For the founder, this creates an alignment of incentives. When your team owns a piece of the company, they are not just working for a paycheck. They are working to increase the value of their own asset. This psychological shift is critical for surviving the hard times inherent in building a business.
Equity versus Cash
#The most common decision a founder makes is the trade off between equity and cash. This applies to both hiring and fundraising.
Cash is a renewable resource. You can always make more revenue or raise more funds. Equity is a finite resource. You can never own more than 100 percent of the company. Once you give a share away, it is gone forever (unless you buy it back, which is expensive).
Therefore, equity should be treated as the most expensive currency you have. Founders often make the mistake of handing out large chunks of equity early on because it feels “free” compared to spending cash from the bank account. This is short-term thinking. A 5 percent stake given to a passive advisor could be worth millions of dollars at exit. You must ask if the value they provide is truly worth that future cost.
Managing the Cap Table
#As you distribute equity, you populate your Capitalization Table, or “Cap Table.” This is the ledger of who owns what.
Maintaining a clean cap table is essential. Investors want to see that the equity is held by the people who are actually building the company. This leads to the concept of “Dead Equity.” This refers to significant ownership stakes held by co-founders or early employees who are no longer working at the company.
To prevent this, equity is almost always subject to vesting. Vesting means the recipient earns their shares over time, typically four years. If they leave after one year, they only keep a fraction of their shares, and the unvested portion returns to the company pot. This ensures that equity remains a reward for continued contribution, not just a signing bonus.
The Founder’s Dilemma
#Ultimately, the goal of a startup founder is to make their equity valuable. This involves a paradox. To make your shares worth money, you usually have to sell some of them to investors to get the capital needed to grow.
You end up with a smaller percentage of the company, but the company itself is worth more. It is the classic choice between owning 100 percent of a grape or 10 percent of a watermelon. You must become comfortable with the idea that your ownership percentage will decrease over time so that the value of your net worth can increase.