One of the most common negotiations on Shark Tank India involves determining the equity stake investors will receive in exchange for funding entrepreneurs. But what exactly does equity stake mean and why does it matter so much?
What is an Equity Stake?
An equity stake refers to the percentage of ownership an investor receives in a company. It represents their claim on the startup’s future profits and growth.
For example, a shark investing ₹1 crore in a company valued at ₹10 crore would get a 10% equity stake. This entitles them to 10% of the business.
Why Do Investors Want Equity?
Instead of simply loaning money, venture capitalists take equity stakes to share in the potential success of startups. The higher the growth and profits, the more valuable their ownership becomes.
Equity gives investors potential upside if the business succeeds. It aligns incentives by linking the investor’s returns to the company’s performance.
How is Equity Stake Calculated?
The equity percentage is determined by the amount invested divided by the company’s valuation.
For example, if a company is valued at ₹5 crores, and an investor contributes ₹1 crore, their equity stake is 20% (₹1 crore / ₹5 crores).
Valuation sets the equity percentage. Higher valuations mean less equity for investors. Lower valuations increase equity allotted.
Why Don’t Founders Want to Give Up Equity?
Founders prefer to minimize the equity they give up to investors. More equity means less ownership and control for entrepreneurs in their own startup.
By keeping higher equity, founders retain decision-making power as well as a greater share of future profits. Significant ownership dilution early on is seen negatively.
What Rights Does Equity Provide?
Equity stakes grant investors certain rights and privileges:
- Voting rights on company decisions
- Claims on dividends/distributions
- Equity value appreciation
- Liquidation proceeds rights
- Right to information/transparency
However, the degree of rights depends on the equity amount and investment terms. Majority equity holders have greater rights and control.
Equity stakes are ownership interests in startups that provide investors potential for financial returns. But they also represent dilution of founders’ control. Negotiating fair equity splits is crucial for both entrepreneurs and investors collaborating to build something great.