Financial Glossary
Equity
Equity is the residual ownership interest in an asset or business after all liabilities have been deducted. On a balance sheet, shareholders' equity = total assets minus total liabilities. Equity represents what owners would theoretically receive if all assets were liquidated at book value and all debts paid. In the context of private companies, equity takes multiple forms: common stock, preferred stock (which may carry liquidation preferences, dividends, and anti-dilution rights), options, and warrants. Equity value differs from enterprise value: equity value = enterprise value minus net debt. Equity can also refer to ownership stake percentage in a jointly held asset, such as real property.
Problem & Application
Formula: Equity = Assets - Liabilities. A campground property has total assets of $3,200,000 (land $1,500,000, improvements $1,200,000, equipment $300,000, cash $200,000) and total liabilities of $1,800,000 (mortgage $1,650,000, accounts payable $150,000). Book equity = $1,400,000. If the property sells at $3,800,000 (market value exceeds book value), the equity realized after paying off the $1,800,000 in debt = $2,000,000 -- illustrating why book equity and market equity differ. For startup founders, equity dilution mechanics matter: issuing new shares increases assets (cash in) but also increases the denominator of the equity fraction each founder holds. A founder holding 60% before a $1M seed round at a $4M post-money valuation will hold 60% x ($4M pre-money / $5M post-money) = 48% after -- 12 percentage points of dilution for $1M in primary capital.
In Short
Equity is central to ownership and financing decisions but requires careful management to maximize returns and minimize risk.