WTF is Equity???? - Part 2

Ok, so now we know what the dealie is with Equity, right? For those of you who forgot, you can continue reading, pretending that you DO know, or you can have a quick look here.

Equity is that magical word which basically represents your share of ownership in the business. So, as mentioned in the previous post, if you put in $1000 into your business, that means that you own a $1000 in you business. Right? Of course.

Now, you can continue with this 'arrangement' of being a lonely soul, owning your business all by yourself 100%. But yet, for some strange reason, Business Owners, (Just like Single Men) decide to go out and find a partner, even though they were doing perfectly fine on their own (Just like Single Men). So, lonely business owner seeking partner finds a partner and says, 'Hey, invest in my business and we can share profits equally!'


Said partner brings in another $1000. So what happens to the Business equity now? Simple:

$1000 (from before) + $1000 (brought in by new partner) = $2000

Isn't that super! Your business now has $2000 equity (which you don't have to pay back to anyone) to spend! Yay! Oh, but wait, its not exactly your business anymore now is it...? Its OUR business. (Just like how your RX-7 is now OUR car after marriage). So, according to logical mathematics, you own $1000, your partner owns $1000, so effectively, each of you controls 50% of the business:

$1000/$2000 X 100% = 50%

It goes without saying that any profit-sharing activity from the business should be split 50/50. I should point out that previously, you owneed 100% of the business and took 100% of the profits.

So, what is the point i'm trying to make here? The point is this: Equity, just like Liabilities, has a cost. While the cost of liabilities are apparent on the income statement (Expenses: Interest Expense - ouch), the cost of equity is less apparent and manifests itself as a gradual loss of control over your own business. Its not uncommon to see many small mom and pop shops stay small mom and pop shops simply because they refuse to obtain equity from other investors because they want to retain control of the business. Is that a good thing? I suppose it is if you want to run a small mom and pop shop for the rest of your life and whine about the 'Good 'ol Days' when the Large Multinational Supermarket (i.e. Walmart/Tesco) moves into your neighbourhood and drives you out of business.

For business to grow, they need additional sources of finance. Liabilities are expensive and hurt your business' cash wallet. Equity on the other hand, costs your business next to nothing, but will cost YOU (the individual) your ownership in the business. But lets be serious, not a single MNC (Multinational Corp.) is owned by a single individual, they all have diverse and global shareholders. What is a SHAREHOLDER? I'm sure many of you are familiar with this term, but are unsure of its relation to equity. We shall learn more in the next posting!