Understanding Equity: What Women Business Owners Should Know About Ownership and Control

Equity is more than just a buzzword in the business world—it’s a cornerstone of ownership and control. For women business owners, understanding how equity works is crucial not only for managing your current business but also for planning its future. Whether you’re just starting out, considering bringing on investors, or planning to expand, knowing the ins and outs of equity will empower you to make informed decisions that align with your vision.

What Is Equity?

At its core, equity represents ownership in a company. When you start a business, you own 100% of the equity. As your business grows, you might decide to bring in co-founders, employees, or investors, and with that, equity is often shared. The percentage of equity you retain versus what you give away determines your level of control over the company.

Equity as Ownership: The more equity you hold, the more ownership and, typically, the more control you have over business decisions.

Equity as Value: Equity also represents the value of your stake in the business. As your company grows and becomes more valuable, so does the worth of your equity.

Issuing Equity: Understanding the Implications

Issuing equity is a common practice when you’re looking to raise capital or bring in talent. However, it’s important to understand the implications of diluting your ownership.

Dilution of Ownership: When you issue equity to others, you dilute your ownership percentage. For example, if you own 100% of your company and bring in an investor who takes a 20% stake, your ownership decreases to 80%.

Control vs. Growth: While issuing equity can provide the funds needed to grow, it can also mean giving up some control over the company. It’s essential to strike a balance between maintaining control and securing the resources necessary for expansion.

Types of Equity: Common vs. Preferred

When issuing equity, it’s important to understand the difference between common and preferred shares, as they come with different rights and privileges.

Common Shares: These are the most basic form of equity and usually carry voting rights, giving shareholders a say in important company decisions. Common shareholders are often last in line to receive payouts in the event of liquidation.

Preferred Shares: Preferred shares often don’t carry voting rights but come with other benefits, such as priority over common shareholders when it comes to dividends and liquidation proceeds. This can make them attractive to investors who are more interested in financial returns than in decision-making power.

Maintaining Control: Strategies for Women Business Owners

As a woman business owner, you may be particularly concerned with maintaining control over your company’s direction and mission. Here are a few strategies to consider:

Creating Different Classes of Shares: By issuing different classes of shares (e.g., Class A and Class B), you can retain voting control even as you bring in investors. For example, you could hold Class A shares with 10 votes per share, while offering investors Class B shares with 1 vote per share.

Using Vesting Schedules: When granting equity to employees or co-founders, consider using vesting schedules. This means their equity is earned over time, which can help ensure long-term commitment to the company while protecting your ownership stake.

Implementing Shareholder Agreements: A well-drafted shareholder agreement can outline the rights and obligations of each shareholder, helping to prevent disputes and ensuring that you retain control over key decisions.

Equity and Fundraising: What You Need to Know

Raising capital by selling equity is a common way to fund business growth, but it’s important to approach this with a clear understanding of the trade-offs.

Valuation Matters: The amount of equity you give away in exchange for investment is closely tied to your company’s valuation. A higher valuation means you can raise more money while giving away less equity, so it’s important to get an accurate and favorable valuation.

Investor Expectations: When you bring on investors, they may have certain expectations about the direction and growth of the company. Make sure you align on goals and that you’re comfortable with the level of influence they’ll have over business decisions.

Planning for the Future: Exit Strategies and Equity

Equity plays a significant role in your exit strategy, whether you plan to sell your business, pass it on to family members, or take it public.

Selling Your Business: If you plan to sell, the equity structure will determine how proceeds are divided among shareholders. Ensuring you maintain a significant equity stake can lead to a larger payout when the business is sold.

Succession Planning: If you intend to pass your business on to a family member or employee, consider how equity will be transferred. You might want to gradually transfer equity over time to ensure a smooth transition while maintaining control until you’re ready to step down.

Initial Public Offering (IPO): If you’re considering an IPO, understand that this process involves selling shares to the public, which can significantly dilute your ownership. However, many business owners retain significant control post-IPO by holding onto a large percentage of the shares or through different share classes.

Conclusion

Equity is a powerful tool for business growth, but it’s also a critical component of ownership and control. For women business owners, understanding how equity works and making informed decisions about how to manage it is key to building a successful and sustainable business. By carefully considering how to issue, manage, and protect equity, you can maintain control of your company while leveraging the resources you need to achieve your goals.

If you’re navigating equity-related decisions and need guidance, consulting with a transactional lawyer can provide you with the insights and strategies necessary to protect your interests and ensure your business thrives.

About the Author

Sarah Powell is a partner with the Firm and Co-chair of the Corporate & Business, Commercial Real Estate, and Cannabis Practice Groups. Sarah has advised companies in a variety of corporate transactions ranging in complexity, including stock and asset acquisitions and divestitures, mergers, joint ventures and other strategic alliances.  In the area of commercial real estate law, she handles the purchase and sale, development, financing and leasing of commercial and industrial properties, as well as the formation and governance of condominiums, cooperatives and planned communities. Sarah also advises cannabis clients regarding the licensing process and other regulatory issues at both the state and local levels.  In 2023, Sarah and firm partner, Seth Tipton, coauthored New Jersey Cannabis Regulation, the first and only book of its kind focused on New Jersey cannabis law. Sarah graduated from Emory University School of Law and Haverford College. She is licensed to practice in Pennsylvania, New Jersey, and Georgia.