Equity is the ownership share in a company. It represents what belongs to the owners after debts are subtracted, and it usually carries rights: a share of profits, a share of a sale, and often votes. How shares are created, transferred, and priced depends on your legal form, country, and contracts.
The word is used in two ways. In accounting, equity is a balance sheet figure: assets minus liabilities. In financing conversations, equity means shares and the percentage of the company each holder owns. Both are correct, so check which one the other person means.
Percentages move as you raise money. An example. You own 100 percent. An investor puts in 200,000 for 20 percent, which prices the company at 800,000 before the money and 1,000,000 after. Your share falls to 80 percent. In a later round you sell another 20 percent, so your 80 percent becomes 64 percent. That sounds bad until you attach values. 100 percent of a company worth 800,000 is 800,000. 64 percent of a company later valued at 5,000,000 is 3,200,000. Dilution is a problem only if the money does not grow the company.
Equity is also used to pay people. Employee shares and founder shares are usually tied to a vesting schedule, so the rights are earned over time instead of granted on day one.
The mistake that causes the most damage is promising shares verbally in month one. A founder offers 10 percent to a friend who helps on a few weekends, with nothing in writing and no vesting. Two years later that person owns a tenth of the company and has not worked on it since.
How shares are created, transferred, taxed, and priced depends on your legal form, your country, and your contracts. This is general information, not legal, tax, or investment advice. Get qualified local advice before you sign anything.
