There are plenty of perks when it comes to working at a start-up (hello, never having to put on a suit again!). But, while ping pong tables and video game breaks in the office may help you get through the day, owning a piece of a potentially multi-million (or billion) dollar start-up is undoubtedly one of the best.
In short, having equity in a company means that you have a stake in the business you’re helping to build and grow. You’re also incentivized to grow the company’s value in the same way founders and investors are. To quote Fred Wilson, founder of Union Square Ventures and blogger on AVC.com, employee equity “reinforces that everyone is on the team, everyone is sharing in the gains, and everyone is a shareholder.”
But receiving equity is no simple matter—equity packages come in all shapes and sizes, and it’s important to understand the ins and outs of what you’re getting before you join any start-up. To get you started, here are some key questions you should ask yourself and your potential employers to help you evaluate your offer.
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How to grow your wealth through owning equity in the company where you work
How to calculate owner’s equity
Companies calculate owners equity at the end of each accounting term, which can be monthly, quarterly or yearly. Business owners do this to pay dividends to shareholders and also to show earnings to potential investors. You can calculate the equity in business by performing these steps:
1. Calculate the total assets
Assets are any investments that a business owns, which can include tangible assets such as office furniture, product inventory, cash, equipment and fixtures, and intangible assets such as intellectual property. A companys asset list can be extensive because it should include every single item that you can sell for money or vested interest in a company. To calculate the total assets, place a value on each, then add up the total recorded value.
2. Calculate the total liabilities
Liabilities are a companys debts and other financial obligations that it is responsible for. This can include loans, mortgages, accrued expenses, due wages and income taxes. Add up all current and long-term liabilities to get the total liabilities of the company.
3. Calculate equity
After you calculate the total assets and liabilities, subtract the liabilities from the assets. The end result is how much total equity is in the business. For example, if a companys office space is worth $500,000 and the valuation of its intellectual property is $1 million, but they have debts that total $700,000, the companys equity equals $800,000. Shareholders will typically earn dividends at the end of an accounting period based on equity, their investment in the company and the number of shares they own, although some corporations may choose to retain dividends for capital gains.
What is owning equity?
When someone owns business equity, it means that they own a financial interest in a company. Those who own equity are referred to as shareholders. Individuals may also refer to equities as securities, which is an investment that a shareholder can sell or transfer for money. If a company were to close and pay off its debt, a shareholders equity is the money they would collect.
Example of owner’s equity for businesses
Shareholders equity can come in many forms, depending on how the business owners set up the company. Owners equity can come in the form of:
Common stock is one way to divide up the ownership of the company. It includes shares that represent a percentage of that ownership, and the amount of stock that each shareholder owns can vary. For example, if your company has a total of 100 shares, each share is worth one percent ownership in the business. The number of shares a shareholder may own usually depends on the amount of their initial investment. Individuals may also be able to buy common stock as an investment in the company.
Preferred stock is similar to common stock in that it is stock that represents part ownership in a company. The major difference between common stock and preferred stock is that the latter does not give shareholders the right to vote on company policy or its board of directors. Preferred stock is also prioritized over common stock so, in a liquidation, the company will pay out preferred stock owners before common stock shareholders.
Treasury stock consists of the shares that a company buys back from shareholders, usually for the purpose of reselling to the public or simply retiring those shares. Treasury stock does not pay out dividends or have much value, although they may change to another form of stock if they are resold at a later date.
After calculating the total equity of the company and paying out dividends to shareholders, any net income left over is called retained earnings. If a company has retained earnings at the end of an accounting period, it may choose to reinvest that profit into other aspects of the business, such as expansion or necessary research.
Calculation examples for owner’s equity
How a company calculates equity may vary depending on the assets it holds and the number of liabilities it has. Here are some examples of how companies may calculate equity:
Worldwide Travel, LLC employs travel agents who help people plan their vacations. Owners want to know what equity is in the business. The company owns land valued at $60,000, office equipment worth $15,000 and cash of $20,000. The company also owes $10,000 to the bank for its startup loan and it owes another $10,000 for general business purchases.
Assets = $60,000 + $15,000 + $20,000 = $95,000
Liabilities = $10,000 + $10,000 = $20,000
Owners equity = $95,000 – $20,000 = $75,000
The value of Worldwide Travel, LLC is $75,000.
Construction Supply Co. sells construction equipment to other companies. Their assets may include equipment inventory valued at $2 million, cash of $50,000 and a warehouse valued at $500,000. Their liabilities owed include $700,000 to creditors and $50,000 for other liabilities.
Assets = $2 million + $50,000 + $500,000 = $2,550,000
Liabilities = $700,000 + $50,000 = $750,000
Owners equity = $2,550,000 – $750,000 = $1,800,000
The value of Construction Supply Co. is $1,800,000.
Midway Paper sells paper supplies and printing services to customers. Shareholders want to know the total equity of the business. Assets may include cash of $40,000, paper inventory valued at $100,000, accounts receivable totaling $20,000 and printing equipment valued at $50,000. The company also owes bonds totaling $30,000, taxes totaling $20,000 and $10,000 in wages. Their equity calculation will show:
Assets = $40,000 + $100,000 + $20,000 + $50,000 = $210,000
Liabilities = $30,000 + $20,000 + $10,000 = $60,000
Owners equity = $210,000 – $60,000 = $150,000
The value of Midway Paper is $150,000.
Owning equity versus company market value
While the amount of equity you own represents your part ownership in the company, a companys market value refers to the value of the company according to the stock market. Company market value takes into account how the market is currently valuating the shareholders held shares. Because the economy runs on supply and demand, and there are constant changes to the stock market, a companys market value may fluctuate.
Market value is also called market capitalization and is calculated by multiplying a companys sold shares by what the company is currently trading at, or its current share price, to determine what its worth on the open market. For example, if a company is trading at $100 per share and has 100 shares outstanding, the companys market value is $10,000. Knowing a companys market value is important for investment opportunities.
How to increase owning equity on a balance sheet
A company may want to increase owning equity to show the value of the company to investors or to entice shareholders to purchase additional shares, among other reasons. If a company wants to increase the owning equity on a balance sheet, it may:
1. Increase shareholders capital
A company may issue new shares to investors to increase equity. These shares can be common stocks or preferred stocks, and they increase equity by increasing the number of assets that come from contributions to and investments in the company.
2. Reduce costs
Reducing costs can increase the owning equity on a balance sheet because there should then be fewer liabilities. Companies may choose to lower employee costs by reducing employee benefits or eliminating non-essential positions. Another way to reduce costs is by finding a way to lower other operational costs. For example, a company may use lower-cost materials in its products, implement tools to increase production efficiency and sign a vendor that provides more cost-efficient labor.
3. Close an office
Another way to increase owner equity is by closing one of the companys offices. The office closure can help reduce the money that is paid out for rent, utilities, insurance and the other costs that come with maintaining an office.
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