What is equity and how can it be dangerous?

Equity is the portion of a business that belongs to owners.

Quite frankly, “book equity,” the difference between your written assets and liabilities, is not terribly useful to web entrepreneurs  because our businesses usually have few assets on the books.  We like to take advantage of Section 179 write-offs.  Furthermore, as I’ve written before, web businesses should try to minimize their assets.

So book equity (assets minus liabilities) is not a great measure of your business’s value.

Now close your eyes.  Equity is what you will one day sell when your company goes public, yielding hundreds of millions of dollars.  Like FaceBook, Groupon or LinkedIn.  This is your ownership in the business.

Many web businesses freely give away shares of ownership in exchange for work.  Ever see The Social Network?  This is very tempting in a start-up because equity doesn’t seem to be terribly valuable, and it doesn’t hurt your cash flow to give away stock.  In the long-term, however, you are giving away your ownership in the company.  Think long and hard before you do this.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

Trackbacks/Pingbacks

  1. The Accounting Equation: Assets = Liabilities + Owners’ Equity « Accountinator - February 13, 2012

    […] your business owes.  The difference between these what you – the owner – actually own: owner’s equity. Suppose your business has $100,000 in assets and $30,000 in liabilities.  Then $70,000 of your […]

  2. The balance sheet explained « Accountinator - March 28, 2012

    […] Balance Sheet lists a company’s assets, liabilities, and owners” equity at a given point in time.  It follows the accounting equation and will help you understand a […]

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