Thu, 15 April 2021
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
Equity is used for investment purposes to give the investor an ownership stake in the company.
To calculate your ownership percentage you take the number of shares you are purchasing and divide it by the total number of outstanding shares. Another way to calculate your ownership is to use the pre-money-plus-investment-equal-post-money valuation equation.
Each share is priced so you know how much you’ll pay for that equity stake.
Be forewarned that startups on the venture track will continue to raise funding and add more shares to the outstanding share pool thus diluting your percent ownership.
In most cases, the valuation will go up with each successive round of funding so the total valuation of your equity stake will increase even though your percent ownership declines.
It’s not unusual for CEOs exiting their company to have less than 10% ownership of the company.
Also, there are different types of equity. There are common shares and preferred shares. Preferred shares carry additional advantages over common shareholders.
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